The pound slumped versus the euro on Tuesday as concerns over the health of the UK economy surfaced one again. The pound euro exchange rate dropped to a low of $1.1334, giving up all the gains from Monday’s session.
|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 plummeted after UK factory orders hit a 17-month low in April. The manufacturing purchasing managers index dropped to 53.9 from 55.1 and also missed expectations of a lesser decline to 54.8. A reading above 50 separates expansion in the sector from contraction. Whilst poor weather conditions had be blamed for weak figures in February and March, the same excuse could not be used for a disappointing April print.
|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.
Economic stats coming out of the UK have been very disappointing over the past three weeks. Just a month ago markets participants were preparing themselves for an interest rate rise in May. Following a slew of worse than forecast economic readings, a Spring rate hike is now highly improbable. Even if the construction pmi and services pmi give encouraging prints, the Bank of England will almost et their sights further out towards Autumn at the earliest. As investors pushed back interest rate hike expectations the pound dropped.
Today investors will look towards the construction pmi, which is expected to show a rebound from March’s sharp decline. Should the rebound fail to materialise the pound could sink lower still.
The previous session was a relatively quiet session for the euro as investors watched developments over trade tariffs from the White House. The EU has been given a one-month reprieve from steel and aluminium tariffs just hours before they were due to begin. The move has failed to defuse tension between the two sides with the EU and the US at loggerheads as to how to make the reprieve permanent. The euro has been under pressure since talks of the tariff started. The tariffs could impact on economic growth in the eurozone which is bad news for the euro.
Investors will switch back towards economic data to drive the direction of the euro today. With fears increasing over the loss of momentum in the eurozone economy, market participants will be watching GDP data for the bloc closely. Should economic growth be slower than the 2.5% forecast by analysts, the euro could fall.
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.