The pound finished approximately flat against the US dollar in the previous session, after there were no surprises from UK economic growth figures. Heading into Friday, the pound is gaining some ground against the US dollar, keeping the exchange rate above US$1.28 and picking the rate off levels last seen in late June.
Demand for the pound remained solid on Thursday, where the main event was the release of the second estimate for the UK GBP. As analysts had forecast, the rate of economic growth was unrevised and showed a sluggish rate of growth of just 0.3%. This was slightly faster than the 0.2% growth experienced in the first quarter. These figures were modestly encouraging showing that economic growth has picked up over the course of the last three months. As a result, investors bought into the pound pushing it to a day’s high of US$1.2837, before it eased back slightly to close at US$1.2810.
|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.|
With no major UK economic announcements due out today, investors will be watching for any further Brexit headlines. Foreign Secretary Boris Johnson commented that the UK could pay the divorce bill from the EU. This is a softening of stance by the British government and could indicate a smoother Brexit could be on the cards, which would boost the pound.
The main event today for dollar investors will be a key speech from Federal Chair Janet Yellen, on the second day of the Jackson Hole summit. Lasting three days the summit of central bankers provides a platform for speakers to warn of changes to upcoming monetary policy announcements.
The Federal Reserve have increased interest rates twice so far this year. However, economic data from the US is extremely mixed, with inflation failing to push closer towards the Fed’s 2% target. Sluggish inflation and an economy sending mixed signals is not an ideal backdrop to which to raise interest rates again. Investors will be particularly keen to see if Yellen provides any hints as to whether a third interest rate rise will be on the cards before the end of the year. Clues that a third rise is still a possibility could send the dollar higher.
|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.|
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