The forex market is buzzing with activity as investors navigate a sea of economic data and central bank commentary. A key focus today is the UK’s economic performance and its impact on the pound sterling.
On Thursday, November 13, the British pound is under scrutiny as markets digest a series of disappointing data releases. The Office for National Statistics revealed that the UK’s Gross Domestic Product (GDP) contracted by 0.1% on a monthly basis in September. This news, coupled with other indicators showing declines in industrial and manufacturing production, has put the pound under pressure.
The GBP/USD pair initially reacted bearishly, dipping towards 1.3100 before recovering slightly. At the time of writing, the pair is virtually unchanged, hovering around 1.3130. But here’s where it gets controversial: some analysts argue that the market’s reaction might be an overreaction, given the UK’s recent economic challenges.
And this is the part most people miss: the UK’s economic data isn’t the only factor influencing the pound’s movement. Investors are also keeping a close eye on comments from central bank policymakers, anticipating updates on US data releases following the end of the government shutdown.
The heat map below illustrates the percentage changes of major currencies against each other. The base currency is on the left, and the quote currency is across the top. For instance, if we look at the British pound (GBP) against the US dollar (USD), we see a 0.54% change, indicating a slight strengthening of the pound against the dollar this week.
| Currency | USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF |
| — | — | — | — | — | — | — | — | — |
| USD | -0.43% | 0.09% | 0.54% | -0.41% | -1.27% | -0.81% | -1.11% |
| EUR | 0.43% | 0.50% | 1.02% | -0.01% | -0.87% | -0.41% | -0.71% |
| GBP | -0.09% | -0.50% | 0.59% | -0.51% | -1.36% | -0.91% | -1.21% |
| JPY | -0.54% | -1.02% | -0.59% | -1.01% | -1.84% | -1.38% | -1.73% |
| CAD | 0.41% | 0.00% | 0.51% | 1.01% | -0.76% | -0.42% | -0.77% |
| AUD | 1.27% | 0.87% | 1.36% | 1.84% | 0.76% | 0.45% | 0.15% |
| NZD | 0.81% | 0.41% | 0.91% | 1.38% | 0.42% | -0.45% | -0.30% |
| CHF | 1.11% | 0.71% | 1.21% | 1.73% | 0.77% | -0.15% | 0.30% |
The UK’s economic woes aren’t the only story in the forex market. The US Dollar Index, a measure of the dollar’s strength against a basket of currencies, is edging lower after a choppy Wednesday. This comes as the US government shutdown has ended, and there’s uncertainty surrounding the release of key economic data, including employment and inflation figures.
In Australia, upbeat employment data has boosted the Australian dollar. The AUD/USD pair is rising, with the unemployment rate dropping to 4.3% and the participation rate holding steady. This positive news contrasts with the drop in consumer inflation expectations, which fell to 4.5% in November.
The EUR/USD pair is holding its ground, trading at a fresh two-week high above 1.1600. Meanwhile, the Bank of Japan’s Governor Kazuo Ueda has stated that the central bank aims to create a strong economy, which could lead to increased tax revenues without the need for tax hikes. USD/JPY is currently in a consolidation phase above 154.50.
Gold prices are also on the rise, extending their weekly rally. XAU/USD is trading above $4,200, as investors seek safe-haven assets amid economic uncertainties.
But what about the US Dollar itself? The USD is the world’s most heavily traded currency, accounting for over 88% of global foreign exchange turnover. It took over from the British pound as the world’s reserve currency post-World War II. The USD’s value is primarily influenced by monetary policy, shaped by the Federal Reserve (Fed).
The Fed has a dual mandate: to achieve price stability (control inflation) and foster full employment. It uses interest rate adjustments as its primary tool. When inflation is above the Fed’s 2% target, the Fed raises rates, boosting the USD’s value. Conversely, when inflation falls below 2% or unemployment is high, the Fed may lower rates, which can weigh on the dollar.
In extreme situations, the Fed can print more dollars and implement quantitative easing (QE). QE involves increasing the flow of credit in a stuck financial system by buying government bonds from financial institutions. It’s a last-resort measure when lowering interest rates isn’t enough. QE typically leads to a weaker USD.
Quantitative tightening (QT), on the other hand, involves the Fed stopping bond purchases and not reinvesting the principal from maturing bonds. This process is usually positive for the US Dollar.
So, what’s next for the forex market? Keep an eye on central bank commentary and economic data releases for further insights. And remember, in the world of forex, every currency has its story to tell.