Despite the pound US dollar exchange rate hitting a two-week high earlier this week, the momentum hasn’t been maintained. Demand for the pound has since softened and the mood for the dollar has ticked up, meaning the pound US dollar exchange rate has fallen lower once more. Heading into Friday the pound was trading at US$1.2930, more or less the same level where it started on Thursday. However, all this could change given the data due to be released today.
The pound has been under pressure as Brexit talks appear to have hit stalemate. The EU are demanding more progress on key parts of the divorce bill, such as cost. Whereas Britain insists the divorce bill must be discussed in parallel to future trading relations. The issue is that Brexit negotiation are on a very tight timeline which can’t afford delays over deadlocks. Failure to progress the talks in a timely manner could see Britain walk away with no deal. This would mean a cliff edge ending which would be detrimental to businesses and the economy. As the markets realise that that a smooth Brexit may not be a reality, the pound has declined in value.
|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 sees the focus switch back to economic data. The UK manufacturing purchasing managers index could give a small boost to the pound, should the data show resilience in the sector. However, any bounce is expected to be short lived whilst Brexit concerns linger.
Today is the release of the Labour Department’s non-farm payroll report. This is considered the most important release of the economic calendar for dollar traders. The report gives details on the number of jobs created, the level of unemployment and the average wage growth for the month.
Economists are currently expecting 180,000 new jobs to have been created in August. However, given that the ADP payroll numbers on Wednesday showed that the number of jobs created in the private sector was significantly higher than analysts’ estimates, there is a possibility that today’s figures could also be higher.
Analysts also expect the unemployment rate to hold steady at historically low levels of 4.3% whilst average wage growth is expected to tick up to 2.6% on an annualised basis. Should the data released be stronger than what analysts are forecasting then the dollar could continue its recent rally.
|How does the non-farm payroll (NFP) affect the U.S. dollar?|
|It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the good and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.|
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