The dollar fell across the board on Tuesday as more US data points to a weakening economy and Fed speakers dashed hopes of another interest rate rise. The pound US dollar exchange rate rallied across Tuesday breaking through US $1.30 and reaching its highest level in over a month at US$1.3045.
Highlighting the pound’s strength, sterling managed an impressive rally despite news that showed the UK economy was weakening. Growth in the service sector fell to its lowest rate in almost a year in August. Growth came in at an index of 53.1 in August, lower than July’s reading of 53.8 and also weaker than the 53.5 than analysts had predicted. The sector includes everything from restaurants, banks, and education and accounts for over 75% of economic activity in the UK. The slowdown is being blamed on uncertainty stemming from Brexit. However, with the cost of living set to rise higher next year and wage growth to remain stagnant, the squeeze on the consumer could increase further still. As a result, the outlook for the sector is bleak.
Today there is no high impact UK economic data to drive the pound. Instead investors may turn their attention towards Brexit developments in Brussels or in Westminster, ahead of the Repeal Bill on Thursday.
The dollar was under pressure in the previous session. Following Friday’s disappointing labour market data, Tuesday saw factory orders come in at -3.3% month on month for July. Although this was anticipated by analysts, it is another piece of evidence pointing to a weakening US economy. The economy could still deteriorate further after the economic damage caused by Hurricane Harvey.
Therefore, US interest rates could stay low for longer. The next rate rise may not happen now until mid-way through 2018. Federal Reserve official Lael Brainard in her speech echoed these thoughts by warning over lifting interest rates further. Like many other Federal Reserve officials Brainard wants to be certain that inflation is on the right track to reach the Fed’s 2% target level before rates are increased again. The resultant lowering of odds of an interest rate hike in the near future has weighed on the dollar.
|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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