All in all, it’s been a pretty awful week for the pound. Heading into the final day of trading Friday, the pound was down below €1.11 versus the euro. Sterling fell over 1.5%, from a weekly high of €1.1291.
|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.
UK retail sales dropped 0.8% in September, significantly lower than the 0.1% increase that city analysts had forecasted, and also lower than August’s 0.9% increase. The weaker than expected figures are evidence that the UK consumer is holding back their spending. Households are under increasing pressure as prices increase and wages, in real terms, decrease. The weak data means that it’s increasingly unclear as to whether the Bank of England will consider raising interest rates at its monetary policy meeting next month. As the odds of an interest rate hike fell, so did the value of 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.|
Brexit continues to weigh on investor sentiments. German Chancellor Angela Merkel spoke at the EU leaders summit on Thursday and said that “encouraging” progress was being made in the negotiations between EU and the UK over Brexit. She also hinted that trade talks could begin in December, which could be a sign that tensions are easing. The pound, however, remained unconvinced and continued to fall as the possibility of a hard Brexit with no deal remains firmly on the table.
The euro moved higher on Thursday, despite the Spanish government confirming that it will start the process of taking direct control over Catalonia on Saturday. Carles Puigdemont, Catalonia’s leader, declined to renounce Catalonia’s claims to independence. As a result, Madrid will enforce Article 155 of the Constitution, removing semi-autonomous powers from the state. The fact that the Spanish stock market tumbled, but the euro moved higher, means that investors are still viewing this problem as a Spanish domestic spat, rather than a eurozone issue.
Yet, this could still become a eurozone problem quite quickly. The political crisis in Spain has caused the country to cut its growth forecasts for 2018 to 2.3% from 2.6%. The Spanish economy is the fifth largest economy in the eurozone. Should civil unrest ensue on Saturday, then the potential impact of this unfolding political crisis on the economy could continue to grow. A weaker Spanish economy could weigh on the euro going forwards.
|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.|
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.