The pound traded lower versus the euro on Wednesday. A weakening in UK retail sales and the euro’s focus on consumer confidence kept the pound euro exchange rate low. The pound hit a nadir of €1.1263 versus the common currency.
|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.|
A retail sales survey carried out by the Confederation of British Industry (CBI) indicated a slowdown in UK consumer spending. After a strong November, the survey showed a loss of momentum in December, a month which should traditionally see a pick up thanks to shoppers buying up presents before Christmas.
|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.|
Bank of England Governor Mark Carney’s appearance before the Treasury Select Committee capped the losses in the pound. He laid out the central bank’s plans to keep EU banks operating in the UK almost as normal following Brexit. This would keep stability in the financial systems in the UK and the EU, while protecting the City of London’s position as a global financial centre. The measures put forward by Carney would support the UK economy and prevent job losses.
Today sees investor attention shift back towards data. The Gfk consumer confidence index for December could keep sterling under pressure if it shows that consumers are nervous about the future. Given all the uncertainties that go hand in hand with Brexit, weak consumer confidence is almost certain. Public sector net borrowing figures could also cause volatility in sterling.
The euro enjoyed a strong previous session despite weaker than forecast German economic data. Inflation at factory gate level, as measured by producer price index slipped back in November to 2.5% on an annual basis or 0.1% on a monthly basis, missing analysts forecasts of 2.6% and 0.2%. These figures are in line with the cautious tone from the European Central Bank over inflation, which is predicts will not hit its target 2% level until after 2020. Normally a weaker inflation outlook would drag a currency lower.
|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, the euro could retain some of its strength, should eurozone consumer confidence figures give an encouraging picture. Any indication of optimism in the bloc is likely to boost demand for the common currency. Euro traders will also keep an eye on the vote in Catalonia to see whether the independence drive in waning.
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.