The pound traded marginally lower versus the euro in a relatively light trading session on Monday. There was not much for traders to look towards as far as economic data was concerned, so instead the focus was on a splattering of political developments. The pound euro spiked to a low of €1.1275 before quickly recovering and traded within a tight range of less than 20 points, for the rest of the day.
|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 only relevant data for the pound in the previous session, was the release of the Rightmove House Price Index. The data showed that house price growth slowed once again in January to just 0.8%. This is the second straight month that prices are well below the monthly average. The slowing of the housing market shows that consumers are lacking in confidence in the UK market, opting to wait, if they can for further clarity over Brexit before buying. The weak data sent the pound lower.
|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.|
Whilst the odds of an interest rate rise by the Bank of England have increased, Brexit is overshadowing this a continues to keep pressure on the pound. Confusion within the UK Prime Minister Theresa May’s own cabinet, combined with uncertainty over whether the post Brexit transition period will happen, has left pound traders nervous as to what the future holds. A closer alignment to the EU post Brexit being the most beneficial position for the pound.
The euro found support in the previous session from news that Spanish Economy Minister Luis De Guindos is to succeed the European Central Bank (ECB) Vice President Vitor Constancio in May. This move boosts the probability of a northern European or more specifically a German becoming head of the ECB next year, when Mario Draghi steps down. This could influence the ECB’s current loose monetary policy and potentially put the ECB on a path of more aggressive tightening. This would be beneficial for the euro.
|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, investors will look towards German and eurozone economic sentiment data. The German reading will be of particular interest given the political developments in Germany and the forming of the grand coalition at a heavy cost to Chancellor Angela Merkel’s CDU party. A weak reading could weigh on the euro.
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.