GBP/EUR: Pound Declines Versus Euro Ahead Of Data Light Session

The euro is trending lower versus the US dollar on Tuesday. The euro US dollar exchange rate is down 0.2% on the day, as it looks to target US$1.10.

The euro lost ground in early trade on Tuesday despite improved sentiment in the block. The closely watched German ZEW sentiment index showed that the mood among German investors worsened by less in October than what analysts had predicted. The index showed that sentiment fell -22.8 points from -22.5 in the previous month. This was much better than the -26.8 that analysts had expected.

In addition to German sentiment, sentiment in the eurozone as a whole was also better than analysts had forecast at -23.5, versus -33 forecast. That said sentiment at these levels is still historically low. It is still too early for the US – China pact agreed last week to be showing up in these numbers. Concerns that Germany and potentially the eurozone as a whole are heading towards a recession are still very much alive.

There is no more euozone data due for release today. The euro could come under further pressure as investors turn their attention to tomorrow’s eurozone inflation data. Analysts are expecting inflation to remain stagnant at 0.9% in September. Weak inflation will support the case for the ECB to ease monetary policy further.

 

Why do interest rate cuts drag on 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. Lower interest rate environments tend to offer lower yields. So, if the interest rate or at least the interest rate expectation of a country is relatively lower compared to another, then foreign investors look to pull their capital out and invest elsewhere. Large corporations and investors sell out of local currency to invest elsewhere. More local currency is available  as the demand of that currency declines, dragging the value lower.

 

Dollar Rises A Geopolitical Tensions Pick Up

The dollar was advancing in early trade on Tuesday amid an elevation in geopolitical tensions. With no US economic data for investors to focus on geopolitics are centre stage.  When geopolitical tensions increase, investors often look towards the US dollar, the reserve currency of the world, for its safe haven properties.

Investor optimism surrounding the US – China phase 1 trade pact agreed last week is starting to fade. The pact is being viewed as more of a trade truce rather than a trade deal. As a result, tariff escalation risks remain a very real possibility and investors are staying cautious.

Adding to geopolitical tensions, President Trump announced fresh sanctions on Turkey and promised to destroy the Turkish economy after the US withdrew Troops from Syria and Turkey swiftly started an invasion.

 

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 EUR = 1.12829 USD

Here, €1 is equivalent to approximately $1.13. This specifically measures the euro’s worth against the dollar. If the U.S. dollar amount increases in this pairing, it’s positive for the euro.

Or, if you were looking at it the other way around:

1 USD = 0.88789 EUR

In this example, $1 is equivalent to approximately €0.89. This measures the U.S. dollar’s worth versus the euro. If the euro number gets larger, it’s good news for the dollar.

 

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