Tuesday was an unsurprisingly quiet session for the pound US dollar exchange rate. The currency markets continued trading, although most of Europe remained on holiday following Christmas. There was no high-impacting economic data for traders to get excited over in the previous session. However, today could see a little more action return to the markets.
The pound hit a low of US$1.3348 versus the dollar on Tuesday, before regaining lost ground and closing the session flat.
|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.
Many investors are sitting on the sidelines after a busy year for sterling. Politics, and more specifically Brexit, have been the main driver of the pound in 2017 and looks set to carry on dictating the price of the pound in 2018. The most important factor for the pound over the coming year will be a trade deal with the EU. The better the trade deal, the more likely to UK will experience a smooth Brexit, which is beneficial for the pound.
|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.|
Today, once again, the UK economic calendar is very light, as it will be all week.
The dollar traded slightly stronger across the board than in the previous session. Today, those traders that are back watching the markets after the Christmas break will be looking to US consumer confidence figures for December and pending home sales. These numbers will provide market participants with an insight into the health of the US economy.
Last month, US consumer confidence hit a 17-year high, suggesting that consumers were optimistic heading into the festive shopping period. Analysts are forecasting that American consumers are marginally less confident in December, with the index expected to fall from 129.5 to 128. Should consumers prove analysts wrong and consumer confidence hits a fresh, all-time high, the dollar could pick up slightly.
|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.|
Pending home sales is also a useful indicator because the housing market is typically correlated to the broader economy. Pending home sales can be useful to identify economic turning points, so a sudden rise could be considered a strong leading indicator for the economy. The reading released last month for October showed the biggest increase in pending home sales in 8 months.
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