The euro continued to get hammered on Tuesday as political turmoil in Italy and Spain turned investors away from the common currency. The pound euro exchange rate rose for a second straight session, reaching a monthly high of €1.1496, before easing back to close the day 0.3% higher at €1.1488.
|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 was trading broadly lower in the previous session, albeit stronger than the euro. The pound is limited by a broad range of factors, from weak economic data, to a cautious Bank of England, to a lack of clarity and progress on Brexit.
Last week UK economic data confirmed once again that the UK economy was performing significantly worse than what analysts had been anticipating. Furthermore, inflation also moved lower, edging towards the central bank’s 2% target. Softer inflation makes an interest rate rise by the BoE less probable and market participants are now doubting whether a rate hike in August will happen at all. As the odds of an interest rate rise have declined, the pound has sold off.
|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.|
Not even news that billionaire investor George Soros is back a bid to hold a second referendum over leaving the European Union within the next year, has been able to lift the pound. In fact, the continued toing and froing and lack of clarity is doing more damage than good to the pound. Mr Soros believes that the promise so far of a costly, drawn out Brexit could encourage a convincing majority to vote against it.
Concerns over the political turmoil in Italy continued on Tuesday. Analysts are now suggesting that Italy could be heading back to the polls as early as July. Carlos Cotteralli, the caretaker Prime Minister appointed by Italian Head of State, Sergio Mattarella, failed to present a list of ministers, meaning there will be no interim government. This means a snap election is now the most likely next step.
Analysts expect the Eurosceptic populist parties to fare even better, than in the previous elections. This means that a populist ruling party in Italy is even more likely, which would be bad news for the euro, given the Eurosceptic nature of these parties.
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.