Solid economic data and encouraging Brexit news sent the pound higher versus the euro on Monday. The pound hit a high of €1.1254 versus the euro, it highest level in three sessions, before easing slightly into the close.
|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 outlook for the pound increased as the new week began, following upbeat economic data. Figures showed that service sector activity in the UK picked up in February to 54.5 from 53 in January and ahead of analyst’s expectations of 53.5. The numbers suggest that the UK service sector expanded at its fastest pace since October 2017.
Given that the service sector is the largest contributor to the UK GDP, an upbeat reading bodes well for the overall health of the UK economy.
|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.|
Comments later in the afternoon, by UK Prime Minister Theresa May also offered support to the pound. Theresa May said that Britain was nearing a transition deal with the EU. Here comments come in stark contrast to EU Chief negotiator Michel Barnier, who only last Thursday raised concerns about the difference which still remained between the two side’s positions. The prospect of a transition deal, softening the blow for UK businesses after the UK leaves the EU, boosted the pound.
With little in the way of high impacting economic data, investors will turn their attention towards a speech by Bank of England Chief Economist Andy Haldane. Investors will be looking for any hint as to the possibility of an interest rate rise in May.
The euro was out of favour in the previous session. Investors continued to digest the Italian election results, which saw a record number of Italians vote in favour of anti-establishment or Eurosceptic parties. As no single party or bloc won the necessary quantity of votes to form a government, a hung parliament looks to be the most likely outcome. A hung parliament will do little to support Italy’s fragile economic recovery.
On the other hand, supporting the euro, was news that the political vacuum in Germany was ending. The opposition party, the SPD voted in favour of a grande coalition, putting Angela Merkel back in charge of government for a fourth term. Given Merkel’s strong pro- euro pro-EU stance any falls on the back of the Italian election are being limited by gains owing to German politics
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.