GBP/USD: North Korea Tests Hydrogen Bomb in Another Show of Defiance

TransferWise content team
3 minute read

The pound US dollar exchange rate received a boost at the end of last week after US jobs data failed to impress investors, pulling the dollar lower. As the markets drew to a close the pound was trading at US$1.2950. Kicking off the new week and moving into Monday, the pound shifted higher versus the dollar as geopolitical tensions were once again on the rise following further defiance from North Korea.

Solid UK economic data on Friday distracted sterling traders from the lack of progress in Brexit negotiations. News that the UK manufacturing sector expanded at the quickest rate in four months boosted the pound. The weaker pound following Brexit is benefiting the manufacturing sector by making it more competitive. Both domestic and export orders have pushed production to the highest level since February. Friday’s figures paint an encouraging picture for the economy as it rebalances from a predominantly consumer based economy to an economy which receives support from a strong manufacturing base.

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.

Today the focus will now turn to the construction sector. City analysts are forecasting that the construction sector has expanded slightly more in August than in July at an index of 52, compared to 51.9 in July. Any figure above 50 indicates expansion.

Poor jobs data & another NK missile

As the new week began, US dollar investors continued to mull over the disappointing jobs data that fell short of what analysts were anticipating, which ensured the mood for the US dollar was weak heading into the weekend. 156,000 jobs were created in the US in August, against a forecast of 180,000. The rate of unemployment also unexpectedly moved higher from 4.3% to 4.4%.

Investors were also watching the unfolding drama with North Korea, after the rogue state continued to advance its nuclear programme by testing a hydrogen bomb. The action has been condemned by US President Trump, South Korea and Japan. Kim Jong-Un also risks infuriating China as the test was carried out as the Chinese President Xi was welcoming leaders for the BRIC summit, overshadowing the event. Inventors often move towards safe haven currencies in times of geopolitical tension, however given the involvement of the US, investors have looked towards other safe haven assets and currencies for protection, keeping demand for the dollar muted.

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