GBP/EUR: Will Draghi Talk Down Euro vs Pound Again?

The pound pushed higher versus the euro on Tuesday, although it was unable to hold onto the gains moving through the afternoon. The pound euro exchange rate hit a high of €1.1300 before drifting lower towards 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 pound gained ground during the UK Chancellor Philip Hammond’s Spring Statement. Philip Hammond announced that the Office of Budget Responsibility (OBR) has raised the UK economic growth forecasts for 2018 to 1.5%, from 1.4%. This move reflects the resilience of the UK economy in the face of Brexit uncertainties. Government deficit was also falling at £45 billion, with borrowing at 2.2% of GDP. The government finally has its spending under control and no longer borrows for day to day funding. The good news on the economy, initially lifted 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.

However, the good news ended there, and the market was unable to hold its gains. UK economic growth for 2019 and 2020 remained constant at 1.3%, whilst growth for 2021 and 2022 was downgraded. This is the first time in modern history that all GDP forecasts are below 2%. So, whilst the global economy is booming, the UK is staring at years of lacklustre growth. Furthermore, this is all subject to Brexit uncertainties meaning that the picture of the UK economy could be worse going forward.

Today the economic calendar is once again very light. In the absence of any Brexit headlines, eurozone factors are more likely to drive the pound euro exchange rate.

Euro Boosted By OECD Growth Forecasts

The euro found support in the previous session from upbeat OECD economic growth forecasts. The OECD anticipate that the eurozone economy will growth at 2.3% in 2018 and 2.1% in 2019. The OECD upgraded their forecasts citing a strengthened global economy and increased investment in the bloc, which combined could boost employment and trade within the eurozone. This would be euro positive.

Today there are several influential data releases for the eurozone. These include industrial production and German inflation. However, the central focus is likely to be a speech by European Central Bank President Draghi in Frankfurt. Market participants will be keen to hear if Draghi continues with his cautious rhetoric, akin to his post monetary policy announcement press conference. A cautious sounding ECB encourages investors to push back hopes of an interest rate rise. This would send the euro lower.

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.

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