After a difficult morning on Tuesday, the pound later rallied strongly to finish the day in positive territory versus the euro. Early on, the pound euro exchange rate hit a six-day low of €1.1278, before surging northwards to a day’s high of €1.1390 for the pound
|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.
Continued uncertainty over the possible solution to the Irish border issue weighed on sentiment for the pound in early trading on Tuesday. Weak service sector PMI data, also did little to help investors’ mood for sterling. PMI, or Purchasing Managers Index measures the health of the industry by surveying Purchasing Managers.
UK service sector activity slowed by more than what analysts had been anticipating in November. The service sector PMI was 53.8, compared to 55.6 in October, with any figure over 50 indicating expansion. Of particular concern, is the slowdown in hiring, which slipped down to levels last seen in March. Economic and political uncertainty, in addition to increased costs resulted in firms holding back from making new hires. The weak data kept sterling moving lowe versus 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.|
The pound picked up later on Tuesday as Brexit optimism returned. However, this was short lived. Moving into Wednesday the pound was lower once more, as reports surface that UK Prime Minister Theresa May has canceled her trip to Brussels today. She has allegedly been forced to cancel the trip because there is still no solution to the Irish border problem. Pound traders are aware the clock is ticking and are unnerved by the lack of progress.
Data from the eurozone was not very encouraging, which means that the mood for the euro soured. Eurozone retail sales fell dramatically in October, causing concern for buyers of the euro. Retail sales slumped to 0.4%, missing analysts forecasts of 1.7%. and falling significantly from Septembers 4%.
Retail sales figures serve as a good indication for future inflation expectations. Lower retail sales mean consumers are not spending, which is bad news for inflation. The eurozone suffers from low inflation, which is preventing the European Central Bank (ECB) from raising interest rates. A weak outlook for inflation will push the odds of an interest rate rise even lower. As the odds for an interest rate rise fall, so does the currency’s value.
|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.|
Today’s most noteworthy eurozone data will come from Germany, in the form of factory orders and retail sales. Although this is not considered high impacting data, if it comes out as strong it could still support the euro given that Germany is the largest economy in the eurozone.
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.