GBP/USD: Pound and Dollar Driven By GDP Data in UK and US

29.01.18
3 minute read
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After an impressive last few days, the pound began to lose its value versus the dollar. Now, the pound is at 1.4125 versus dollar, which is marginally less compared to its value over last weekend, but is still high compared to the value of the pound during the beginning of this week, or even compared to the beginning of the month. This shows that despite small setbacks pound continues to be relatively strong.

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.

GDP figures drive the currency pair

Gross Domestic Product (GDP) figures drive the both the dollar and pound. The UK saw a GDP figure for the fourth quarter which came in higher than what the analysts had expected. As a result, pound rallied. For US, the fourth quarter GDP figures came in weaker than expected. However, the dollar continued to regain at least some of its loses following US President Donald Trump’s optimistic comments regarding the US stock market, and economy in general. President Trump’s conciliatory tone with the EU leaders also inserted stability in the value of dollar versus the pound. These factors contributed to some return of the dollar following a tumultuous week.

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.

Today, the top leadership of EU bloc will meet to discuss criteria for for negotiating a transition period that would bridge Brexit in March 2019 and the start of new trading terms. This would be highly impactful and any news of criteria that is beneficial for UK is bound to support the pound. The week for US is critical as well. Tomorrow the US will see the release of inflation data. This is especially important at this time as this week will also see the first meeting of FOMC and inflation data is one of the key points that the FOMC considers in making decisions regarding inflation rate hikes. Should the inflation come in higher than expected, the pound will further regain its losses.

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