Pound Lower vs. Dollar Due To Strong Employment Data in the US

07.12.17
4 minute read
Tagged:

After falling through most of the previous session, the pound steadied moving towards the end of the day on Wednesday. A lack of progress in the Brexit deal weighed on the pound and pulled the pound US dollar exchange rate lower. It hit the day’s lowest point at US$1.3358 for the pound, before climbing marginally higher into the close.

What do these figures mean?

When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute.

For example, it could be written: 1 GBP = 1.28934 USD

Here, £1 is equivalent to approximately $1.29. This specifically measures the pound’s worth against the dollar. If the US dollar amount increases in this pairing, it’s positive for the pound.

Or, if you were looking at it the other way around: 1 USD = 0.77786 GBP

In this example, $1 is equivalent to approximately £0.78. This measures the US dollar’s worth versus the British pound. If the sterling number gets larger, it’s good news for the dollar.

Pound traders continue to watch Brexit developments intently. After UK Prime Minister Theresa May failed to agree on a deal with the EU at the beginning of the week, she is now scrambling to progress in the necessary talks in order to meet the deadline next week. The Irish border issue remains a big problem. Theresa May and Northern Irish unionists have so far failed to decide on a way around the problem that all sides are happy with.

Theresa May needs to be judged to have progressed the Irish dispute by next week. Failure to do so could mean that trade deal and transition deal talks will be kicked back further; a move which would lower the chances of a smooth Brexit.

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 the focus will remain on Brexit. Finally, on Friday a flurry of UK economic data could give pound traders some solid news for pound traders to digest.

Dollar Stronger Across The Board

The dollar had another positive session on Wednesday. Investors continued to mull over the US tax reform making its way through congress, The House and the Senate have both passed different versions of the bill, which is now being reconciled. Investors are generally of the opinion that the reform will be good news for the US economy. However, some analysts question how much impact it can have on an economy that is already growing at 3.3%?

The release of ADP private payroll data has pulled investor attention back towards economic data. The data gives a picture of the sector by measuring employment, hours, and earnings of workers from company payrolls. The US saw 190,000 new private payrolls added in November. This was the figure that analysts had expected and confirms that the US jobs market remains robust. Today will see the release of jobless claimant counts, before Friday’s non-farm payroll data from the US labour department.

The is dollar is buoyant on tax reform optimism. Should data over the coming days be positive, the dollar could rally higher.

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.
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content is the publication is accurate, complete or up to date.

TransferWise is the smart, new way to send money abroad.

Find out more