GBP/USD Pound High vs. Dollar As US-China Tensions Soar

Wise

Strong UK service sector data lifted the pound on Tuesday, whilst tensions between China and US worsened weighing on the dollar. The pound US dollar pushed through US$1.34 to its highest level in 10 days.

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.

UK service sector activity jumped in May to 54, up from 52.8 in April and above the 53 figure anticipated by analysts. This marks a hat-trick of stronger than forecast pmi readings. Whilst the construction pmi and the manufacturing pmi were stronger than analysts had forecast, new orders were very low. The service sector, however, showed a strong increase in new orders. This means that May’s jump is not just down to a rebound in activity following the harsh weather conditions earlier in the year; it is also down to strong new orders, which bodes well for the outlook of the sector. The strong numbers pushed the pound 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.

There is no influential economic data due for release today. Investors will be listening carefully as 2 Bank of England policy makers give speeches. One of the policy makers is Ian McCafferty, who is a known hawk at the BoE. This means that there is a high probability that he will be speaking in favour of an interest rate rise sooner rather than later, which could boost the pound.

Fresh US - Sino Tensions Over Taiwan

The dollar was broadly out of favour in the previous session. Trade war fears were overshadowing the positive US data.

Trade talks between US and China broke down over the weekend. The Trump administration has also announced that it will go ahead with plans to levy tariffs on allies Mexico, Canada and the EU. Those affected by the tariffs have promised retaliation meaning that a global trade war is almost certain. This would be damaging for global trade and therefore global growth, which is bad news for the dollar.

Tensions between US and China soured further after the Trump administration told airline firms to ignore requests by China over how to label Taiwan. China has asked that US airlines such as Delta and American Airlines refer to Taiwan, China. This will aggravate China and comes at a time when relations between the two powers are quickly deteriorating.

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