The pound moved higher versus the euro on Monday, recouping some of the lost ground from Friday’s session. The pound euro exchange rate climbed to a high of €1.1374 for the pound. However, this is still over 125 points short of December’s high of €1.1508 for the pound, where it was earlier in the month.
|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 = 1.13990 EUR
Here, £1 is equivalent to approximately €1.14. This specifically measures the pound’s worth against the euro. If the euro amount increases in this pairing, it’s positive for the pound.
Or, if you were looking at it the other way around: 1 EUR = 0.87271 GBP
In this example, €1 is equivalent to approximately £0.87. This measures the euro’s worth versus the British pound. If the sterling number gets larger, it’s good news for the euro.
The pound received a boost in the previous session, after the Confederation of British Industry (CBI) reported strength in the manufacturing sector. The CBI announced that manufacturing order books were close to a 30-year high. The cheaper pound has increased demand for UK manufactured goods abroad. However, lower value of the pound also means that cost pressures have increased for manufacturers.
|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.|
Investors and businesses are expecting the Government’s recently unveiled industrial strategy to make quick progress next year. This should offer additional support to the UK manufacturing sector and the UK economy as a whole.
The outlook for the pound remains vulnerable as a quiet economic calendar today will leave investors looking at Brexit headlines again. Discussions begin this week among UK Prime Minister Theresa May’s Cabinet over the future trading relationship with the EU. Theresa May is reportedly looking to leave the EU single market and customs union and still retain many of its benefits – a proposal that the EU is unlikely to agree with.
Inflation in the eurozone ticked higher to 1.5% in November, from 1.4% in October. However, core inflation, which does not measure more volatile items such as food and energy, remained steady at 0.9%. Last week the European Central Bank (ECB) had unnerved investors with weak inflation forecasts, despite strong economic growth. Weaker inflation usually means an interest rate rise from the central bank is pushed further into the distance.
|Why do raised interest rates boost a currency’s value?|
|Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.|
Therefore, yesterday’s reading was a relief for euro buyers. It was enough to keep euro investors happy and prevented the euro from heavy losses against a stronger pound.
Today Germany will be back in focus with business confidence data. Analysts are expecting business confidence in Germany, the largest economy in the eurozone, to have increased again this month. In November the IFO index reached a record high, which it is expected to do again in December, supporting the idea of a strong German economy. The IFO index is a leading indicator for economic activity prepared by the Ifo Institute for Economic Research in Munich that measures business climate, current business situation and business outlook in Germany.
This article was initially published on TransferWise.com from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.