Data from both the eurozone and the UK was disappointing keeping the pound euro exchange rate fairly well matched for most of the session. The pound slipped marginally versus the euro, dropping to €1.1440 by the end of trading on Thursday.
|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.
News that UK service sector activity dropped to its lowest level in 20 months, weighed on sentiment for the pound. The pmi dropped to 51.7 in March, down from 54.5 in February, well below its long-term average. The weakest print for the service sector pmi was largely caused by a surprisingly high level of snowfall throughout the UK which kept consumers from hitting the high street and also weighed on other parts of the sector. Cost pressure in the sector also remained strong, whilst employment plans and new orders were weak, giving an overall weak report just ahead of the May Bank of England monetary policy meeting.
There had been growing optimism that the BoE could be seriously considering raising interest rates in May, rather than waiting until October. However, with very weak service sector data, in addition to a contracting construction sector, the central bank could be concerned that the UK economy is not strong enough to weather a rate rise. Therefore, the weak service sector data served to reduce the odds of a rate hike, pulling the pound 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.
Today there is no high impacting UK economic data, instead investor will look towards wage data next week for further clues.
Disappointing eurozone data meant that the euro was broadly out of favour in the previous session, albeit less so than the pound. Retails sales in the eurozone increased a lacklustre 0.1% month on month in February, well short of 0.6% analysts had forecast. Meanwhile January’s reading was also revised downwards to just a decline of 0.3%. On an annualised basis, retail sales increased 1.8%, failing to reach the 2.3% analysts had anticipated, whilst January’s print was also revised downwards to just 1.5%. The weak data kept pressure on the common currency.
|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.
Not only was the data disappointing but it also suggests that inflationary pressures are not building up quickly in the eurozone. This goes hand in hand with the weak core inflation figures released earlier in the week.
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.