Retail sales, central bank decisions and tax reform news meant Thursday was a volatile session for the pound US dollar exchange rate. The pound US dollar rate traded an 85-point range hitting a weekly high of US$1.3460 for the pound, before moving lower.
|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.
UK retail sales data boosted investors’ mood towards the pound in the previous session. Figures showed that the UK consumer continued to hit the shops in November, despite increasing prices and lower wages in real terms. Retail sales increased 1.5% year on year, much higher than analysts’ forecasts of 0.2% and well above October’s revised figure of 0%. This increase is most likely down to Black Friday shopping, when consumers hit the shops hard to pick up bargains before Christmas. The strong data boosted the pound.
|Why does strong economic data boost a country’s currency?|
|Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.|
Following the retail sales surprise, the Bank of England (BoE) policy rate decision was a non-event. The central bank kept rates on hold, as market participants had predicted. The BoE also made reference to the Brexit deal agreed last week, saying that it could reduce the probability of a disorderly Brexit. However, they did not change their interest rate outlook on the back of these thoughts. With no change in interest rate guidance, the pound barely moved.
With no high impacting UK data today investors could focus on Brexit developments, after UK Prime Minister Theresa May’s trip to Brussels yesterday.
US Retail sales data impressed dollar traders in the previous session. Retail sales for November increased 5.8% year on year. As with the UK, the high figure is in part thanks to strong spending on Black Friday. Strong retail sales figures can point to inflation increasing further down the road, and given the US’s persistently low inflation, this news was well received.
Also keeping the dollar stable was news that the US tax reform bill was progressing through Congress. The new bill could be ready as soon as today, meaning that it could be voted on next week. The prospect of the bill landing on President Trump’s desk for signing before Christmas, is good news for the economy.
|How would Trump’s tax reform boost the US dollar?|
|A sizeable corporation tax cut would see a flood of money repatriated to the USA which would then create a high demand for the currency. In turn, this would increase its value versus other currencies.|
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