Pound To US Dollar Rate Pares Early Gains After Weak US Jobs Data

Published: Friday, 24 August 2012 09:00 BST - Written by Ben Hughes

STORY LINK Pound To US Dollar Rate Pares Early Gains After Weak US Jobs Data

Conventional wisdom suggests that Quantitative Easing is bad for the currency which belongs to the economy carrying out the Quantitative Easing. However, conventional wisdom is not always correct.

Wednesday night saw the Federal Reserve drop heavy hints about the future direction of its monetary policy. The US’s central bank released the minutes of it monetary policy meeting from earlier this months and analysts interpreted comments contained in the minutes regarding ‘direct action’ in the near-term as a tacit announcement of more QE. The Fed’s statement saw the GBP USD exchange rate tip the 1.5900 level during Thursday’s Asian session as investors anticipated a flood of new Dollars being released onto the credit market. As any A-Level economist will tell you, vastly expanding the supply of a commodity reduces the value of that commodity on the market. Simple.

However, the US Dollar’s relationship with QE is a lot more complicated than that. Global stock markets were buoyed by the Fed’s suggestion of direct action, viewing it as positive news which might spur a tentative global economic recovery. This saw institutional investors shift their funds out of the safe haven of the US T-bill and into more rewarding asset classes. This is what helped trigger such a pronounced move out of the Dollar in the immediate aftermath of the Fed’s minutes.

But, by the middle part of yesterday afternoon’s European session, the Buck had made a concerted comeback, dropping back into the mid-1.58s against the Pound. The USD improvement was largely explained by investors’ approval of direct action by central banks. The Dollar’s recovery was further assisted by some poor US manufacturing sector data; the August Markit Manufacturing PMI survey showed that this key sector of the American economy is struggling to post any growth whatsoever. A worse than anticipated US Initial Jobless claims print added to the renewed wave of safe haven support for the Greenback. There could be more upside to come for the US Dollar later today, with the release of July’s Durable Goods data, traditionally a market-moving risk event.

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