After having spent most of the day around the same level as Friday’s close, the pound finally buckled on Monday evening, dropping towards US$1.2910 versus the dollar. Both the pound and the dollar were out of favour most the day as investors sought safe haven currencies and after UK data disappointed.
The UK construction sector expanded at the slowest pace in a year, after a slowdown in investment hit the commercial sector, a survey showed on Monday. This data highlights the uncertainties that are accompanying Brexit. Only on Friday a similar report showed the manufacturing sector was booming. However, so far the construction sector, the manufacturing sector and exports have failed to make up for the slowdown in the dominant consumer sector as the economy rebalances.
The consumer sector is under pressure as household’s grapple with rising inflation and sluggish wage growth. Today the service sector will be in the spotlight with a similar survey being released which should give an indication as to whether consumers have reined in their spending. The service sector makes up around 80% of the UK economy so any signs that growth in the sectors is declining could keep sterling under pressure for the rest of the day.
|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.|
The US dollar was out of favour for most of the session as investors looked towards safe haven currencies whilst the tensions between North Korea and the US remained in the headlines. Over the weekend North Korea tested a hydrogen bomb as it advanced its nuclear programme. President Trump responded by commenting that the US is considering stopping all trade with any country doing business with North Korea.
It’s worth pointing out that China is the only county which can strangle North Korea economically speaking. China will have been enraged by Kim Jong-Un’s decision to overshadow its BRIC summit whereby Chinese President Xi was welcoming leaders from Brazil, Russia and India. However, it remains to be seen whether China will take a tougher stand towards the rogue state following North Korea’s defiance at the weekend.
Normally in moments of geopolitical tension the dollar would be expected to gain in strength. However, investors are showing a preference towards other currencies such as the euro and the traditional safe haven, the Swiss Franc.
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