The euro was unable to hold its ground against the pound in the previous session despite growing eurozone economic confidence. The pound reached a fresh 5 week high versus the euro on Tuesday, of €1.1413, a level last seen mid-December.
|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.
Sterling has been increasing in value over recent sessions as investor hope have been steadily growing that Britain is heading for a softer Brexit. This would mean avoiding a no deal Brexit. A softer Brexit is much more favourable for the UK economy and therefore for the pound
|Why is a “soft” Brexit better for sterling than a “hard” Brexit?|
|A soft Brexit implies anything less than UK’s complete withdrawal from the EU. For example, it could mean the UK retains some form of membership to the European Union single market in exchange for some free movement of people, i.e. immigration. This is considered more positive than a “hard” Brexit, which is a full severance from the EU. The reason “soft” is considered more pound-friendly is because the economic impact would be lower. If there is less negative impact on the economy, foreign investors will continue to invest in the UK. As investment requires local currency, this increased demand for the pound then boosts its value.|
Brexit hopes aside, the pound was also supported by encouraging data from the Confederation of British Industry (CBI). January’s CBI industrial trends survey pointed to a improved outlook for Britain’s economy, with sentiment among manufacturers continuing to improve. Growth in manufacturing output, and domestic and export orders picked up in the three months to January. The report was not all positive, with some concerns being raised over the ongoing skills shortages.
Today, investor focus will be on the Uk labour data, particularly average wage growth. Analysts are expecting U.K. wages to remain steady, increasing by 2.5% in the three months to November. With inflation at 3.1% in November, this highlights the pressure on households, as wages continue to fall in real terms. Investors will want to see wages ticking higher, otherwise the upside to sterling could remain limited.
|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.|
Positive ZEW economic sentiment surveys from both Germany and the eurozone helped underpin the euro, which traded broadly higher, albeit lower versus the pound. Investors were pleased to see economic confidence grow, particularly in Germany, despite the ongoing political vacuum.
The eurozone economy has had a strong start to 2018, after a solid end to 2017, which could give the European Central Bank (ECB) more confidence to consider tightening monetary sooner, supporting the euro.
Today the emphasis will remain on economic data, with a slew of Eurozone PMI figures due for release. Another round of strong data releases could lift the euro. Although any gains could be capped as investors look towards the ECB monetary policy on Thursday.
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.