GBP/USD: Pound At $1.41 vs. Dollar Amidst Inflation Concerns

16.02.18
4 minute read
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The pound renewed its advance against the dollar on Thursday, pushing back up to $1.41. The move was mostly thanks to the continued decline in the dollar, which even better than expected US data couldn’t prevent. The pound US dollar exchange rate is trading at its highest level for almost two weeks.

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.

There was no fresh economic data or notable headlines that were driving trading in the pound in the previous session. Instead investors were looking forward to some key events today. Firstly, UK Prime Minister Theresa May is flying to Berlin to meet with German Chancellor Angela Merkel for crunch talks over Brexit. The transition period is expected to be high on the agenda and market participants will be watching closely for any developments, especially after EU Chief Negotiator Michel Barnier cast doubts over whether the Transition period would even happen at all. Any clues that a transition period is looking certain could boost 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.

The other key event today will be the release of U.K. retail sales data. The UK economy is principally driven by consumers spending, the level at which consumers are spending can be gauged through retail sales figures. Since Brexit the U.K. consumer has been facing an increasingly challenging environment of high inflation and falling wages in real terms. This means consumers have less disposable income, which can result in the, reining in their spending and weaker retail sales figures. Should sales print less than the 2.4% growth forecast by analysts, the pound could give up some of its recent gains.

Dollar Falls For Fourth Session

The dollar was out of favour for a fourth straight session on Thursday, despite US PPI data reading higher than what analysts had forecast. Producer Price Index (PPI) records inflation at wholesale level. A high reading can indicate that consumer prices and therefore inflation will move higher going forwards. Under normal circumstances this data would send the dollar northwards as higher inflation expectations usually lead market participants to raise their perceived odds of an interest rate rise.

Why do raised interest rates boost a currency’s value?
Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.

However, that wasn’t the case on Thursday and hasn’t been the case over the past few sessions where the dollar has fallen despite higher interest rate expectations.

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