The pound euro exchange rate experienced strong moves again on Thursday, trading a range of 50 points before heading towards the close almost flat for a second straight day, slightly above €1.1410.
|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.
Retail sales rebounded strongly in April, after a particularly soft March. Retail sales jumped 1.5% year on year in April, above the 0.1% forecast by analysts. On a monthly basis retail sale increased 1.6%, smashing analysts’ expectations of 0.5% and increasing sharply from March’s 0.5% decline.
The warmer weather helped bring shoppers back to the high street after the unseasonably harsh weather conditions in February and March meant shoppers remained indoors. This data ended a string of weak statistics which have shown the UK economy in a less than favourable light.
Recent data has not been strong enough to warrant an interest rate rise from the Bank of England. In fact, the recent decline of core inflation to 2.1% has concerned market participants that a rate hike in August in now unlikely. Retail sales data is closely watched because it is considered to be an indication of future inflation. Therefore, a strong increase in retail sales can indicate a lift in inflation down the road. This would increase the chances of a rate hike from the Bank of England (BoE). As a result, the pound moved higher.
|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.|
Investors will now be looking towards UK Gross Domestic Product (GDP) data to see whether the good new surrounding the economy will continue.
Whilst political risk in Italy, plus a slowing of momentum in the eurozone economy have been weighing on the euro. The European Central Bank (ECB) expressed their confidence in the outlook for the bloc’s economy going in the latest ECB meeting. The minutes from the meeting showed that ECB officials believe that economic growth in the bloc could slow further and uncertainty was increasing. However, they still believed that expansion in the eurozone remains on the right path and broad based.
The focus of euro traders will remain on the economic calendar, with the release of German IFO business climate numbers. Following today’s weaker German consumer confidence figures, investors will be looking for more encouraging signs from the business climate data.
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.