The pound euro exchange rate moved higher on Wednesday. This was mainly due to a cautious sounding European Central Bank President, pulling the euro lower, rather than any pound strength. The exchange rate hit a 2 week high of €1.1306.
|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.
With no high impacting economic data released on Wednesday and no fresh Brexit headlines, the pound lacked any firm direction. UK Prime Minister Theresa May’s retaliation to the poisoning of a Russian double agent, by expelling 23 Russian diplomats also had limited impact on the pound. Whilst geopolitical tensions between Russia and Britain have soured rapidly over the past 48 hours, the pound is so far taking the news in its stride.
Looking ahead, pound traders will be eyeing up the next piece of influential data, which is UK inflation, due to be released on 20th March. Inflation in January remained elevated at 3%, significantly above the Bank of England’s 2% target level for inflation. The BoE forecast that inflation will fall to 2% across the next 12 months. Analysts are forecasting that inflation will dip lower in February and that core inflation will also edge marginally lower on a year on year basis. Should inflation show signs of easing, the pound could fall, as the prospects of a rate rise decrease.
|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.|
The euro reacted negatively to a speech by ECB President Mario Draghi once again in the previous session. Only last week Draghi sounded very cautious over sluggish inflation in the eurozone, reining in investor expectations of any monetary policy tightening. On Wednesday, Draghi continued with the same cautious tone, adding that the elevated price of the euro will also keep inflation lower for longer, pushing back the prospect of any interest rate rise.
Industrial production data also weighed on demand for the euro. Industrial production grew more slowly in February than what analysts had been anticipating. Whilst the eurozone economy was booming in 2017, economic data so far in 2018 has been slightly more disappointing. This suggests that momentum in the eurozone economy could be slowing, which weighed on the euro.
|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.|
With no high impacting economic data due for release today, investors will look ahead to Friday’s eurozone inflation figures.
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.