GBP/USD: Will UK GDP Estimate Help The Pound Continue Its May Inspired Rebound?

07.11.17
4 minute read
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The pound started the week gaining back some of its losses from Thursday’s heavy sell off. The pound gained 0.6% in value versus the US dollar on Monday, hitting a day’s high of US$1.3175 for the pound. However, this is still 1% lower than where the pound was trading mid last week, albeit 0.3% higher than where the pound started last week.

What do these figures mean?

When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute.

For example, it could be written: 1 GBP = 1.28934 USD

Here, £1 is equivalent to approximately $1.29. This specifically measures the pound’s worth against the dollar. If the US dollar amount increases in this pairing, it’s positive for the pound.

Or, if you were looking at it the other way around: 1 USD = 0.77786 GBP

In this example, $1 is equivalent to approximately £0.78. This measures the US dollar’s worth versus the British pound. If the sterling number gets larger, it’s good news for the dollar.

The pound was rebounding from last week’s Bank of England (BoE) inspired sell-off. Despite the central bank hiking interest rates in the UK, it gave the impression that the next hike would not come for a long time. This weighed heavily on demand for sterling.

Why do raised interest rates usually boost a currency’s value?
Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.

On Monday, the mood for the pound improved following a speech from UK Prime Minister Theresa May at a Confederation of Business Industry (CBI) Conference in London. The CBI is an organization that acts as a voice for over 190,000 businesses in the UK. Theresa May used the opportunity to discuss her outlook and intentions regarding Brexit. May assured her audience that the government was seeking a transition period in her negotiations with EU leaders, knowing the damage which could be caused by a cliff-edge or hard Brexit. She also struck an optimistic tone highlighting the opportunities that could stem from Britain’s departure from the European Union. Pound investors interpreted May’s speech as positive, which drove demand for the pound higher.

Why is a smooth Brexit good for the pound?
A smoother Brexit would be a scenario in which the economic consequences of leaving the European Union are minimised. This is favourable for the pound because the less the Brexit impact on the economy, the more likely that foreign investors will remain interested in the UK. Foreign investors need sterling to invest in the country and so the more GBP is purchased, the higher the demand and, thus, an increase in the currency’s value.

Brexit will continue to remain in focus as the week moves forward, as another round of Brexit negotiations are due to start on Thursday.

On the UK economic calendar for today, pound traders will look forward to the release of UK retail sales data by the British Retail Consortium (BRC), which could provide an important insight into consumer spending habits. Also, Halifax house prices are due for release, in addition to the National Institute of Social & Economic Research (NIESR) GDP estimate.The Halifax house price index is UK’s longest running, and highly regarded source of information about house prices. The NIESR gives a quarterly estimate of the growth in UK economy using advanced statistical techniques. Both these datasets are important indicators of UK’s economic health and therefore a good result could help raise the value of the pound.

US Federal Reserve Overhaul Continues

The US Federal Reserve remained in the news at the beginning of the week after Federal Reserve monetary policy maker, William Dudley, announced that he would retire half way through 2018. Depending on who will replace him, this move could have implications on monetary policy and, as a result, the US dollar. One possible candidate is Kevin Warsh, who was also in the running to replace Fed Chair Janet Yellen. Warsh is known to be more in favour of aggressive interest rate rising, so should he be selected he could shift the balance in the Fed towards a more hawkish stance.

On Thursday last week, President Trump announced that Jerome Powell’s nomination to replace Janet Yellen as Federal Chair. Analysts believe that Powell will continue along the same policy path that Yellen set. A path which has been characterised by small incremental rate rises since December 2015.

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