Pound Hits Pre-Brexit Referendum Levels Versus The Dollar

25.01.18
3 minute read
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The pound surged over an incredible 220 points on Wednesday, taking the pound US dollar exchange rate back to the brink of its pre-Brexit referendum level. The pound US dollar exchange rate hit a high of US$1.4260.

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.

Employment levels in the UK increased in the three months to November, calming fears over the health of the UK economy. The number of people working increased by 102,000, defying analysts expectations of a drop by 13,000. The jobs report also showed that average earnings increased 2.4% in the three months to November, ahead of the 2.3% that city analysts had been expecting and an increase from the 2.3% recorded in the three months to October.

Inflation in November was 3.1%, meaning that wages actually declined in real terms, increasing the pressure on household budgets. However, the cost of living actual edged down slightly in December, and the Bank of England predict that inflation will continue to fall as the year progresses. With inflation moving lower and earnings increasing, the pressure consumers are feeling should begin to ease. This is good news for the U.K. economy, which is so reliant on the service sector and consumers spending. Following the dat release, the pound jumped.

How does strong jobs data boost the currency?
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 the worth of the currency higher.

Today, investors will look towards the Confederation of British Industry (CBI) retail sales numbers. Retail sales figures released last week showed that spending had slowed more than analysts were expecting. Investors will be keen to see whether sales figures have started to improve.

US Treasury Secretary Welcomes The Weaker Dollar At Davos

The US dollar continued to sink in the previous session as dollar traders reacted to US Treasury Secretary Steve Mnuchin’s comments from the World Economic Forum (WEF) in Davos. Speaking at a conference at the WEF, Mnuchin confirmed the US government's commitment to 3- growth and also broke with tradition by declaring that a weaker dollar is beneficial for US trade. His comments served to fuel market speculation the the US government could be looking to suppress the value of the dollar to boost the economy. The dollar dropped heavily following his comments.

Today, investor attention returns to the economic calendar, with a slew of mid impact releases due from the US, which could create some volatility. However, the tone is likely to remain cautious ahead of President Trump’s speech at Davos and the US GDP data.

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