GBP/EUR: Will Draghi Help The Pound Finish The Week Higher vs. Euro?

The pound euro exchange rate climbed higher for a 2nd straight day on Thursday as investors responded to stronger than expected UK retail sales and lacklustre eurozone inflation data. Sterling increased in value by 0.3% against the common currency, hitting a high of €1.1220 for the pound. However, entering the final trading day of the week, the pound is still some 0.7% lower against the euro than at the start of the week.

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.

Demand for the pound continued to improve in the previous session after investors chose to focus on the positive side of UK retail sales data. On the downside, retail sales declined for the first time in 4 and a half years in October, compared to the same month in 2016. The data showed a contraction of 0.3%, significantly lower than last month’s 1.3%, but above the 0.4% decline forecast by city analysts. On the positive side, retail sales increased 0.3% on a monthly basis, much higher than September’s 0.7% decline and also above analysts’ expected increase of just 0.2%.

It is hardly surprising that the figures are on the weaker side, given the weak wage growth and increasing prices that households in the UK are experiencing. However, consumers are showing resilience, and this is going some way in pacifying pound traders. Following the stronger than expected release, the pound jumped higher.

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.

The is no high impacting data on the UK economic calendar today. In the absence of any Brexit related headlines, investors will shift their attention to next week and the UK Chancellor’s Autumn Statement.

Euro Lowers After Inflation Dips

The eurozone headline inflation figure came in at 1.4% in October, in line with analysts’ forecast. This represents a fall from September’s 1.5%. Meanwhile, on a monthly basis eurozone inflation grew at just 0.1%, down from September’s growth figure of 0.4%, while also missing the level of 0.2% anticipated by analysts.

Demand for the euro softened following the release. This is because the data supports the European Central Bank’s (ECB) generally dovish stance. Weaker inflation means that an interest rate rise is less likely.

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.

With the ECB seemingly unable to boost inflation in the eurozone, investors will be watching ECB President Mario Draghi when he speaks today. Should Draghi sound increasingly concerned over the stubbornly low inflation, the euro could drop further.

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