The pound continued to slide against the euro, proving incapable of holding on to the recent Bank of England (BoE) inspired gains. After hitting a high of €1.1395 at the end of last week, the pound is now trading sub €1.13, with concerns growing that it could fall below €1.12 should today’s UK retail sales data disappoint investors.
|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.
Sterling has been unable to hang onto the momentum from last week’s rally. The pound charged higher at the end of the previous week after the BoE gave its biggest hint in a decade that it may raise interest rates in the coming months. When the odds of a UK interest rate rise increase, generally so does the pound.
|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.
Since then, BoE governor Mark Carney made a speech which was slightly more conservative that what investors were hoping for. As a result, Carney’s words caused the pound to drop. This, coupled with fresh infighting in the UK cabinet over Brexit and the UK’s potential divorce bill from the EU, has knocked demand for the pound.
The pound could find itself under more pressure today following the release of UK retail sales data. Analysts are expecting the retail sales figures to stagnate in August as consumers rein in their spending. A rising cost of living and sluggish wage growth is squeezing households, and this is expected to be evident in today’s lacklustre figures. Any signs of UK consumer resilience could boost the pound, while a low retail sales figure is unlikely to change the BoE’s outlook regarding a rate rise. And should subsequent data also show a significant weakening of the economy, then the odds of a rate hike may diminish and pull the pound lower.
Meanwhile, demand for the euro has ticked higher following an impressive reading in the latest German economic sentiment index. While analysts were anticipating a strong reading, the index actually skyrocketed from 10 in July to 17 in August, smashing forecasts of 12. The impressive figures are thanks to solid 2nd quarter of economic growth figures, an increase in bank lending, and investment activity. As a result, the market has a more positive outlook for the euro than the previous month.
|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.
Euro investors will now look ahead to the European Central Bank’s economic bulletin followed by the German elections on Sunday 24th September.
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.