The June minutes of the European Central Bank (ECB) interest rate decision meeting propelled the euro higher against the pound on Thursday. Consequently, the pound-euro exchange rate dropped to €1.1355, the lowest level for the pound against the euro in over a week.
Although economic data for the pound has been disappointing across the week, it has managed to keep its head above water and hovering close to €1.14. Today, however the pound failed to maintain its composure and the euro shifted ahead.
|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 UK manufacturing, construction and service sector activity and confidence reports through the week all fell short of analysts expectations. Political uncertainty following the general elections and the start of Brexit negotiations have weighed on business sentiment. Furthermore, lower incomes in real terms are holding households back from spending, which is impacting on the UK’s dominant service sector.
|Why does poor economic data drag on a country’s currency?|
|Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.|
The gloom looks set to continue as investors look towards the G20 summit in Hamburg Germany, where a weak Theresa May is set to have several awkward exchanges. Headlines from the G20 could have the potential to push the pound lower if May is proving to be a walkover or out of touch with reality. Any signs of further political instability will not be good news for the pound.
|How does political stability boost a currency?|
|Political stability boosts both consumer and business confidence, which means corporations and regular households alike are more likely to spend money. The increased spending, in turn, then boosts the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. For foreign investors to put their money into an economy, they need local currency. As they acquire the money needed, the demand for that particular currency increases, which then boosts its value.|
The euro on the other hand could be set to build on the gains from the previous session. Minutes from the ECB monetary policy meeting in June have been optimistically interpreted by the markets, sending the euro to recent fresh highs.
The minutes showed that the ECB discussed adjusting the monthly policy message to remove the current reference to additional bond buying. This may seem like a very subtle move, but was interpreted as another important step along the very long path towards monetary policy normalisation and moving interest rates back towards more “normal” high levels. When expectations for interest rates start to shift, even marginally higher, this can give a big boost to a currency, which is what happened to the euro on Thursday.
With little in the way of high impact eurozone economic data today, euro traders will keep their eyes firmly fixed on headlines coming from the G20 summit in Hamburg.
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.