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

Brexit optimism pushed the euro 1.1% higher versus the US dollar in the previous session. The pair soared to a 2 month high of US$1.1174. Month to date the euro US dollar exchange rate has rallied 2.3%. The pair is dropping lower at the start of the new week.

The euro trended higher versus the dollar across recent weeks as investors grew increasingly optimistic of the UK and the EU reaching a Brexit deal. The euro struck a 2-month high following a breakthrough between the two sides, which resulted in a Brexit deal agreement. A Brexit deal would be beneficial to eurozone economies as well as Britain. This is because it reduces uncertainty and risk. As a result, the euro is also driven by Brexit developments.

Parliament frustrated UK Prime Minister Boris Johnson’s Brexit plans on Saturday, by withholding its approval for the Brexit deal until formal ratification legislation has been passed. This is weighing on the euro lower at the start of this week.

Last week was a quiet week for the eurozone economic calendar. The start of this week is also quiet. Thursday’s pmi releases could attract some attention. The same day, the European Central Bank will announce its monetary policy decision. Any signs that the central bank is prepared to ease monetary policy further could drag on the euro.

 

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.

 

Quieter Week For US Dollar Expected

Concerns over the health of the US economy pulled the US dollar lower across the previous week. US dollar investors digested a slew of gloomy figures. US retail sales unexpectedly declined in September for the first time in seven months. This raised concerns that the US consumer, a central pillar to the US economy, was starting to wobble. US manufacturing production also contracted -0.5%, the worst figure for four months.

Investors are growing concerned that the manufacturing slump is deepening and starting to spill across into the dominant consumer sector. Should this be the case, the Federal Reserve could be forced to cut interest rates again the year.

US data will take a back seat this week, with factors affecting the euro more likely to drive movement in the pair. Housing data and durable goods will attract most attention.

 

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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