US Dollar strengthens on interest rate rumours

Yesterday the FED chair Janet Yellen indicated that interest rates in the USA are likely to go up soon, but what does this mean for exchange rates? Interest rates are key to a currencies value, because if the US does raise rates, it means more return for investors. These investors then buy US Dollars causing it to rise in value. We saw that happen yesterday as the GBP/USD rate fell as the Dollar became more expensive to buy.

Euro weakens as Dollar strengthens 

It can also affect Pound/Euro rates too. Yesterday as the USD gained strength, the Euro weakened as investors sold the Euro to buy the Dollar, and that’s why GBP/EUR rates rose to €1.18 yesterday. It was due to weakness in the single currency rather than any strength for Sterling.

Sterling moves lower on employment data

This morning we saw some minor jobs data from the UK. Those claiming unemployment dropped significantly, which was good news. However wage growth slowed to 2.6%. This is important as regular readers will be well aware of, due rising inflation. Inflation figures are around 1.8% at the moment, and forecast to rise. If wage growth slows to below that of inflation, then in effect consumers have less money and that will hurt the economy, possibly weakening Sterling further. Those that need to exchange currency should keep a close eye on inflation through the year as if it overtakes wage growth or gets close to it, the Pound will probably fall in value.

What next for the Pound?

The next major data release is on Friday in the form of the latest retail sales figures. We think that monthly sales will be up by 1% and that’s what is already priced into the market. If it’s lower, then it shows the economy is slowing and the Pound will fall. If the number is higher then expect exchange rates to go up.

Before that, we have another speech by Janet Yellen that is happening as I write this post, and for the reasons I have outlined above this could also move Pound/Euro rates if she gives further insight into when rates may move higher.

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