Pound Slides Vs Dollar as UK Construction Sector Optimism at 5-Year Low

04.01.18
4 minute read
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Yesterday’s session was bad news for pound traders as the pound slid down from a little over 1.36 to 1.3500 versus the dollar before it began to stabilize with many global markets closed. Thursday begins sterling trading at 1.3519 over the dollar, still at one of its highest points in a year for sterling, albeit lower than the previous session’s close.

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.

Yesterday was rough for sterling as poorer-than-expected UK construction industry numbers rolled in. Even though construction orders in the UK are picking up at their fastest pace in nearly 7 months, that only covers the short-term as far as positive news. Surveys reported construction industry optimism for the future is at a 5-year low in the UK. Members of the trade have noted their struggle with growing prices of both imported and domestic construction materials in light of pound weakness post-Brexit vote. With higher good prices and growing uncertainty of the future, this weighed on investor sentiment as pound traders sold out as the day continued.

Why does poor economic data drag on a country’s currency?
Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.

Investors are paying close attention to UK service sector numbers on Thursday for signs of hope that the UK economy will be moving in a growth trajectory for 2018.

Fed Rate Rises No Longer As Enticing to Dollar Investors

Though investors in the greenback remain unimpressed with the potential impact of US President Trump’s tax reform bill, the dollar had a better than usual day on Wednesday over the pound. The US ISM Manufacturing report for December came out at better than analysts’ predicted. As a result, the dollar took advantage of UK weakness with poor construction numbers and rebounded.

The FOMC (Federal Open Market Committee) meeting minutes were released yesterday to only minor notice. The Fed did note that they will continue to raise rates until America reaches its target inflation rate, but investors remained mostly unimpressed. Previously, interest rate raises were cause for dollar investors to rejoice, but rate hikes are becoming insufficient to entice traders in light of the dollar’s continuing weakness.

Thursday data brings US jobless claims, and if numbers are better than expected, this could continue to slow the dollar’s year-long downslide and may even rally the buck. Friday will bring even bigger news as investors look towards US Non-farm payroll changes.

How does the non-farm payroll (NFP) affect the US dollar?
It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the good and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes up the currency’s worth.
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