With little fresh news to go on, the pound drifted marginally lower versus the euro in the previous session. The slight pullback in the pound euro exchange rate is not so surprising given the strong rally that it has experienced across the week. The pond euro exchange rate hit a low today of €1.3317, after climbing 100 points since Monday.
|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.
The pound was rather directionless on Thursday, as no fresh data or news spurred on investors. The pound had a slow start to the week, after data showed UK inflation slowed in December. Lower inflation means an interest rate rise by the Bank of England (BoE) in the near future is less likely. However, since then BoE official and voting member on the monetary policy committee, Michael Saunders, made some encouraging remarks over the health of the UK labour market, which have inspired traders. Mr Saunders said that he expects the unemployment level to fall below 4% and that he also expects wage growth to increase to 3%. A stronger or “tighter” labour market is beneficial to the pound.
|How does strong jobs data boost the currency?|
|It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the good and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.|
Today investors will look towards UK retail sales data for direction. This report has been hotly anticipated, as investors are keen to see whether UK consumers continued spending over the crucial Christmas period. The UK economy is very dependant on households spending. However, households have been coming under heavy pressure from rising prices and falling wages in real terms. Analysts are expecting retail sales to have increased 2.6% year on year, compared to November’s 1.5% increase. A strong reading could boost the pound.
|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.|
Euro Strength is a Problem at ECB
The euro charged higher on Thursday, as investors shrugged off concerns over comments made by some European Central Bank (ECB) officials over the course of the past few sessions. ECB members have expressed their concern over the strength of the euro, particularly versus the dollar. A strong euro could make it difficult for the central bank to return inflation back to the 2% target level set. A strong currency can inhibit inflation growth and the eurozone is struggling right now with very low inflation.
Today, inflation will remain in focus in the form of the German producer price index (PPI). This is inflation measured at wholesale levels. Should the reading be weaker than analysts expect, the euro could ease back.
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.