GBP/EUR: Will Political Developments In Italy Lower Euro vs Pound?

The euro ended the previous week lower against the pound. The euro could struggle at the beginning of the new week as well as investors digest political developments in Italy. The pound euro exchange rate started trading on Sunday at €1.1340 after gaining 0.2% across the previous week.

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 has been held back over the past month by weak economic data which ended in the Bank of England (BoE) keeping interest rates on hold for another month. Officials at the central bank also predicted that inflation will fall quicker they had originally forecast, potentially pushing another interest rate rise further into the future. That said, there is still some optimism that a hike later this year could still be on the table should data pick up. Given that the recent soft patch in data has been largely attributed to harsh unseasonal weather conditions, improved weather conditions should see data recover.

This week is relatively quiet for UK economic releases. Tuesday will be the focus with UK earnings figures and jobless claimant count. Whilst wages have been steadily growing for the past year, they stalled last moth at 2.8%. Investors and the Bank of England alike will want to see wages once again climbing higher. Any disappointment could see the pound drop.

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.

Italy Steps Closer to Eurosceptic Government

This week could be a difficult week for the euro. Over the weekend Italy’s populist parties have come close to forming a government in the eurozone’s third largest economy. A coalition government between 5 Star Movement and the League would resolve the political deadlock and vacuum which Italy has endured since the March elections. However, this union would bring two Eurosceptic parties to power, which could be damaging for the euro and put in questions Italy’s future in the euro and possibly in the eurozone.

Potentially adding to the woes of the euro will be the release of the eurozone GDP on Tuesday and inflation data on Wednesday. Fears have been growing that the bloc’s economy has been losing momentum and inflation struggling. Should the GDP and inflation figures confirm these fears, the euro could be in for a difficult week.

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