Strong UK economic data helped the pound capitalise on the politically battered euro. The pound jumped 0.7% versus the euro on Friday to €1.1449, this meant that the pound increased 0.2% against the common currency through the 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.
Manufacturing activity bounced back in May, after falling to a 17 month low in March. The UK manufacturing Purchasing Managers Index (PMI) increased to 54.4 up from 53.9 in April but still noticeably below the 58.5 high reached only 6 months ago. Investors focused on the fact that the numbers were above what analysts had predicted and this helped lift the pound.
|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.
Delving deeper into the numbers, they were not quite as rosy as they first seemed. This is because much of the increased activity came from producing goods that increased unsold stock, rather than satisfying orders. New orders were at the lowest level for 11 months. This does not bode well for the outlook of the sector.
Today investors will look towards the construction PMI. Pound traders will be keen to see a continuation of April’s rebound after a particularly weak March. Construction PMI is expected to be 52.5, should the reading be stronger the pound rally could continue.
The euro was out of demand for most of the previous week. Concerns over the political turmoil in Italy prevented investors buying into the euro at the beginning of the week. Concerns over Spanish political uncertainty and trade war concerns were in focus in the second part of the week.
On Friday, the long serving Spanish Prime Minister Mariano Rajoy was ousted following a vote of no confidence in Parliament. The socialist leader Pedro Sanchez stepped forward to assume the responsibilities. However, an election will have to be held. There are concerns that Spain could now face an extended period of political instability.
|How does political risk have impact on a currency?
|Political risk drags on the confidence of consumers and businesses alike, which means both corporations and regular households are then less inclined to spend money. The drop in spending, in turn, slows the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. Signs that a country is politically or economically less stable will result in foreign investors pulling their money out of the country. This means selling out of the local currency, which then increases its supply and, in turn, devalues the money.
Looking across this week, concerns over a potential trade war with the US is expected to be the main focus for euro traders. The US has announced that it will go ahead with a 25% tariff on steel imports and 10% tariff on aluminium importance from the EU, Mexico and Canada. The EU has vowed to retaliate with similar measures.
These trade tariffs are expected to slow trade and economic growth, a negative for all the countries involved.
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.