Dollar Remains Firm Verrsus Pound As Investors Look Towards UK GDP and Jackson Hole Summit

24.08.17
3 minute read
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The pound remained under pressure versus the dollar as Brexit continues to be a key theme. Fresh publications on the government’s position has actually weighed on sentiment for the pound rather than supporting it. Heading into Thursday sterling was struggling to hold above US$1.28.

The pound was reacting to the most recent governmental positional paper, which discussed the future relationship between the UK courts and the European Court of Justice. The paper centred on the end of direct jurisdiction by the ECJ, however fell short of discussing a clean break, suggesting that the ECJ could maintain some influence over UK proceedings post Brexit. Despite this being an apparent softening of stance by the UK government, pound investors were not impressed and sterling remained under pressure.

Investors are now looking ahead to the UK GDP second estimate later this morning. City analysts are anticipating the UK economy to have grown by 0.3% on a quarterly basis, up slightly from the 0.2% in the first quarter. GDP measures economic growth, an important statistic for currency traders. A weaker than forecast figure will ensure that the pound continues to slide versus the dollar.

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.

Renewed hope for tax reforms boost dollar ahead of Jackson Hole Summit

The US dollar was managing to hold firm as investors focused on Federal Reserve Chair Janet Yellen’s upcoming speech at the Jackson Hole summit tomorrow. The markets are expecting a confident message from Yellen regarding the US economy; however, hopes of any further interest rate rises before the end of the year remain firmly below 40%.

The dollar was also receiving a boost from renewed headlines surrounding Donald Trump’s tax reforms. US business are now expected to vocally support the tax reforms, improving the chances of the bill being passed in Congress. This is welcomed news as investors had been starting to fear that Trump was alienating himself from key supporters and his party which would have made passing the tax reform bill more challenging. Any signs that Trump’s pro-growth economic agenda is back on track is good news for the buck.

How would Trump’s policies boost the U.S. dollar?
A sizeable corporation tax cut would see a flood of money repatriated to the USA which would then create a high demand for the currency and, in turn, increase its value versus other currencies. Infrastructure spending in a country already close to full employment would also push wages higher, leading to more spending and thus boosting inflation. Higher inflation leads to higher interest rates and a higher demand for the currency.

Given the focus on Yellen’s appearance at the Jackson Hole summit, it is unlikely that investors will pay much attention to economic releases today. US jobless claims and new homes sales are the two main data points today; however they are unlikely to impact on the market unless they drastically miss analysts’ forecasts.

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