Weak manufacturing data in the UK kept the pound out of favour among traders on Monday. Meanwhile, euro investors continued to mull over the consequences of the vote for independence in Catalonia. The pound euro exchange rate dropped 0.1% across the session, hitting a low for sterling of €1.1314.
|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 demand for the pound fell in the previous session as recently released data pointed to a weakening UK economy. Manufacturing activity in the UK slowed in September to 55.9, down from 56.9 in August and weaker than the figure that analysts had anticipated. Although any figure above 50 indicates an expansion in manufacturing activity, the data points to a continued slowdown in momentum for the economy and is in contrast to the hopes that the sector would have received a boost from the weakened pound. Economists had assumed that a weaker pound would boost demand from abroad, thanks to more competitively priced products. However, instead, manufacturers are finding that any increase in exports is being offset by an increase in production costs. After the weak GDP reading on Friday, yesterday’s weak manufacturing data is doing little to encourage traders to invest in the pound.
|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.|
Today, the UK construction sector activity data will be reported. The construction sector has suffered heavily since Brexit, with August’s figure hitting a one year low. Should UK construction activity fall again in September, the pound could take another step lower versus the euro.
The euro was trading lower against all its major peers except the pound. Investors continue to deal with the unfolding political situation in Spain and, as a result, the euro has been out of favour. After 90% of the 2.2 million ballots cast were in favour of independence, the Catalan president Carles Puigdemont said that Catalonia now has the right to separate from Spain. He is calling on the European Union to mediate a split despite the vote being classified as illegal and unconstitutional by the Spanish government.
The EU is viewing this as an internal matter, and so far the euro has been relatively measured in its response to this political turmoil. Of course, the demand for the euro is lower, but it certainly hasn’t fallen off a cliff. For the time being, investors are waiting to see how the situation develops. If the political wrangling continues and there is little sign of an agreement, then it could start to weigh more heavily on the value of the euro.
|How does political risk have impact on a currency?|
|Political risk drags on the confidence of consumers and businesses alike, which means both corporations and regular households are then less inclined to spend money. The drop in spending, in turn, slows the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. Signs that a country is politically or economically less stable will result in foreign investors pulling their money out of the country. This means selling out of the local currency, which then increases its supply and, in turn, devalues the money.|
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.