GBP/EUR: Will EU Inflation Data Send Euro Lower vs. Pound?

The pound euro exchange moved higher on Wednesday as UK economic data impressed whilst eurozone stats were in line with expectations. The pound euro exchange rate hit a peak of €1.1385.

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 rallied after traders finally received some good news regarding the UK economy. After a month of UK economic data underwhelming, the UK construction sector figures impressed. UK construction activity rebounded in April, by more than analysts had forecast, after falling sharply in March. The construction pmi printed at 52.5, up from March’s 47 and above the anticipated level of 50.5. Construction is not a hugely significant part of the UK economy, however given the decline had been so dramatic in the previous few months it had impacted on economic growth. Therefore, a stronger than forecast reading was cheered by investors.

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.

Today market participants will look to the service sector pmi for further clues as to the health of the UK economy. Activity in the service sector is expected to have rebounded in April after falling close to contraction in March. Whilst the service sector is the dominant sector in the UK economy, even if activity is stronger it will most likely be a case of too little too late for the Bank of England. Investors had thought that the central bank were going hike rates this month when they meet. However, following a slew of poor data, the rate rise looks well and truly off the table.

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.

Eurozone economy declines as expected

The euro was broadly out of favour in the previous session as economic data provided little reason for investors to buy in. The eurozone economy slowed in the first quarter, as analysts had expected to 2.5% growth on an annualised basis. Whilst this is still a faster pace of growth than in the UK or the US, it still represents a slowdown from the end of 2017. The euro rocketed in value across 2017, boosted by economic growth in the region. Therefore, a slowdown of growth is causing the euro to trade lower.

Investors will now look to inflation data for the region, which is also expected to have declined. Lower growth and lower inflation would mean an more aggressive European Central Bank is highly improbable.

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