GBP/USD: US Inflation To Push Pound to $1.40 vs. Dollar?

13.03.18
4 minute read
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The outlook for the pound US dollar exchange rate improved on Monday pushing the exchange rate 0.4% higher. The pound gained 0.3% versus the US dollar, hitting $1.39 for the first time in a week.

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.

The pound was broadly in favour on Monday, boosted by hopes of a Britain achieving a post Brexit transition deal being close. Junior Brexit Minister Robin Walker made the claim on Monday at a speech at the Institute of Directors. He also acknowledged the importance of the deal being achieved as quickly as possible.

The post Brexit transition deal is expected to be a period of about 2 years whereby the UK would continue to adhere to EU regulation in order to provide a level of certainty and continuity to businesses. This would be the best possible exit for Britain’s economy and therefore 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 UK Chancellor Philip Hammond will deliver his Spring Statement. This will be a toned-down version of the Autumn Budget, meaning it could be a rather bland event. There will be no tax announcements and no spending announcements. Instead investors will be paying close attention to the update of economic forecasts and public spending forecasts. This information could cause some volatility in the pound if it slightly weaker than analysts had been anticipating.

Dollar Weaker Ahead Of CPI Data

The mood for the dollar continued to weaken in the previous session as investors continued to digest Friday’s jobs data and also look ahead to today’s inflation numbers.

Data on Friday showed that wages growth slowed by more than what analysts had forecast, which pulled the dollar sharply lower. When wage growth is low, inflationary pressure are low. Therefore, investors reined in the probability of 4 interest rate hikes from the Fed this year, which caused the dollar to sell off.

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.

Today market participants will look towards consumer price index data for further confirmation of whether inflation is still moving higher. Analysts are forecasting that inflation will increase at 0.2% year on year in February, down from 0.5% in January. Meanwhile, analysts are anticipating that core inflation which strips out more volatile items such as food and fuel, will print at 1.8% year on year. This is still below the central bank’s 2% target.

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