GBP/EUR: Will ECB Draghi Pull Euro Lower vs Pound?

The pound euro exchange rate climbed steadily higher on Tuesday. The euro came under pressure as economic growth in Germany slowed, whilst the pound remained buoyant following UK labour force figures. The exchange rate climbed to €1.1421, it highest level in 3 days.

Pound traders responded well to news that the UK unemployment rate held steady in March at a multi month low of 4.2%. Meanwhile, the closely watch wage growth number also printed in line with analysts’ expectations at 2.9% in the three months to March. Given that inflation was 2.5% in the same month, domestic inflation should slowly start to move higher, which is good news for the pound. As investors are once again seeing an increase in their wages outpacing price increases, the pressure on the consumer purse is easing. This should bee that the consumer can spend more which is extremely important for the UK economy, given it is so dependent on the consumer.

How does strong jobs data boost the currency?
It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the good and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.

However, there was also a darker side to the report. The number of people seeking unemployment benefits increased. This is usually a negative signal for the future labour market. Forth the time being pound traders were not focused on this, but should the benefit claimants number continue to rise then investors could start to raise an eyebrow.

Euro Drops As Data Disappoints

A sharp slowdown in German GDP hit demand for the euro. Economic growth in Germany, Europe’s largest economy, halved from 0.6% to 0.3% quarter on quarter on quarter. Investors were notably disappointed by the reading even though there are some transitory reasons such as cold weather and the uncertainty over the German coalition talks which could be partly responsible for the slowdown. However, fact that there were some pre-existing concerns over a slowing of momentum in Europe means that investors were particularly sensitive to this weak reading.

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.

Today sees the release of German and Eurozone inflation in addition to a speech by European Central Bank President Draghi. Should inflation show signs of softening and Draghi acknowledges the stagnant inflation in the eurozone, the euro could slide lower.

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