Today brings in more good news for pound investors. The pound slowly, but consistently regained the losses made yesterday against the euro. It rose 1.1327 in the morning yesterday to 1.1419 and has more or less remained at that level all of yesterday and early today.
|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.
Investors welcomed the comments made by the Bank of England (BoE) Governor Mark Carney in his speech to the lawmakers of UK’s upper house of Parliament that the BoE is firm on its resolve to tackle high inflation. This indirectly means that the Bank will raise interest rates consistently in the near future. This is good news for the pound and as a result, the pound rallied aggressively. The Governor also assured lawmakers that the UK economy is in a good shape, with wages and labour market at a firm growth path. This eased investors who were beginning to get concerned about the fate of UK’s economy amidst heightening uncertainty concerning post-Brexit trade deals between the UK and the bloc.
|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.|
Yesterday, news came in that the euro zone economy expanded at its fastest rate in a decade for the year 2017 year. The European Union’s statistics office Eurostat said that euro zone GDP rose 2.5 percent. This means that the health of EU economy is quite robust and resilient to the political setbacks it has been having. This good news dipped the value of the pound versus the euro for a short while but it was insufficient in holding euro’s ground against a rising pound. This morning also saw the release of German retail sales data, which came in less than expected. This also helped in euro’s push downward versus the pound.
This evening will see two more important economic releases from the EU. First, the German Unemployment Claims data and second the EU Consumer Price Index core. Both these are highly important data points and will surely inject volatility in the pound euro exchange rate.
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.