GBP/EUR: Will Eurozone Inflation Lower Euro vs Pound?

After falling in early trade on Tuesday, the euro rebounded off session lows of US$1.0991 to hit a high of US$1.1046 versus the US dollar. The euro US dollar exchange rate finished flat on Tuesday. The pair is extending gains in early trade on Wednesday.

The euro surged on Tuesday on reports that the EU and the UK were closing in in a draft Brexit deal. A report on Bloomberg boosted optimism, saying that the two sides were close to a deal. The strong move higher in the euro is reflective of the positives that a Brexit deal would bring to the eurozone, as well as to the UK.

Today euro traders will look ahead to eurozone inflation figures, as measured by the consumer price index (CPI). The eurozone has been suffering from lacklustre inflation and that doesn’t look as if it is about to change. Analysts are predicting that eurozone inflation remained steady at just 0.9% year on year in September. This is well below the 2% European Central Bank target. Weak inflation will prompt investors to assume that the ECB could look to ease monetary policy further in a bid to boost stagnating inflation.

 

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.

 

Will US Retail Sales Lift Dollar?

The US dollar trended lower on Tuesday as Brexit optimism and a strong start to US earning season boosted risk sentiment. Third quarter earnings kicked off on Tuesday. Results of the largest banks in the US reflected a relatively healthy US consumer and more wary business sector. The broadly stronger than forecast numbers had helped calm fears on the US economy boosting risk sentiment.  When risk sentiment increases investors often sell out off the safe haven dollar.

After a quiet week so far ton the US economic calendar, things will start to pick up today. Investors will look towards US retail sales for clues on the outlook of the US economy. Analysts are forecasting that US retail sales ticked lower in September to 0.3%, down from 0.4% in August. Investors will be watching closely for signs that the US economy is resilient despite the ongoing US – Sino trade dispute. Up until now retail sales have remained robust, showing that US consumers are happy to spend. In other words, the manufacturing slump hasn’t spilled over into the consumer sector.

 

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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