Weaker than expected inflation in Germany, the economic powerhouse of Europe, weighed on sentiment for the euro on Monday. The pound euro exchange rate charged higher, hitting a daily peak of €1.1372 for the pound before easing off into the close of the trading session. This is the strongest level that the exchange rate has traded at in a month.
|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.
Growth in UK consumer credit slowed in September, although this is unlikely to impact on the Bank of England (BoE) rate decision on Thursday, so the pound remained firm. The central bank will be pleased that consumers are moving away from bridging the gap between rising prices and falling wages by using credit to purchase goods and services. However, the reluctance to use credit also indicates a weakening in consumer confidence towards the UK economy.
Consumer confidence data today is expected to confirm this trend, with analysts forecasting another decline in the consumer confidence index.
Monday kicked off well for the euro, with the common currency managing to hold its ground, despite events in Catalonia. Strong German retail sales boosted the euro, however the optimism didn’t last long. Inflation data for Germany showed that prices in the powerhouse of Europe unexpectedly slipped by 0.1% over the month, missing analysts’ expectations that prices would remain steady. This monthly drop meant that the annual inflation reading declined from 1.8% to 1.5%. Following the release, investors quickly sold off the euro, as the weak reading doesn’t bode well for today’s eurozone-wide inflation data.
Today will be action packed for the euro, as the 3 most important economic indicators will be released for the eurozone. Today is being hailed “Super Tuesday”. Firstly, the eurozone GDP is due to show that the eurozone economy is growing at 0.5% quarter on quarter. This would translate to an increase to 2.4% on an annual basis. The eurozone economy has gained momentum across the year so optimism is running high among investors. A weaker GDP figure, however, could weigh on the euro.
|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.|
Other economic indicators include the eurozone inflation reading. Analysts are anticipating that core inflation in the eurozone will be 1.2%, marginally down from last month’s 1.3%. This is still significantly below the central bank inflation target rate of 2%. Following Germany’s disappointing reading yesterday, there is a strong possibility that eurozone inflation could also miss forecasts. Should this be the case, then the European Central Bank (ECB) will feel very comfortable with the conservative tone that they portrayed at the ECB meeting last week. Should inflation figures disappoint then the odds of an interest rate rise could remain firmly in the distant future, which could keep the euro under pressure.
|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.|
Finally, the eurozone employment data for September will also attract investors attention.
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.