A very cautious sounding European Central Bank (ECB) President, Mario Draghi sent the euro tumbling. Meanwhile, UK retail sales smashing analyst’s expectations and lifted the pound. As a result, the pound euro exchange rate rallied over 1% to hit a two and a half week high of €1.1462.
|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 surged in early trade on Thursday as investors cheered strong retail sales date. Retail sales jumped in May by 4.4% year on year, up from 1.4% in April and smashing analysts’ expectations of 2.5%. The royal wedding and warmer weather luring consumers back to the high street, boosting the numbers. Additionally, the UK consumer has now enjoyed 3 months of wage growth outpacing inflation, as a result, households are feeling less pressure on their paychecks, meaning higher spending. This is good news for the consumer dependent economy. Furthermore, retail sales are often considered an indication for future inflation, therefore could go some way towards the case for a Bank of England rate rise.
|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.|
The data was particularly well received given the lacklustre figures that had been released this week, including manufacturing output slumping to a 5 year low, wage growth unexpectedly dipping and inflation remaining constant.
After a busy week of data releases and Brexit news for the pound, today is expected to be quieter session. There is no UK data due for release.
The euro dived following the ECB rate decision and press conference. As analysts had expected, the ECB kept interest rates on hold. As expected, the ECB policy makers had also discussed the winding down of the current bond buying programme at their meeting. The ECB expressed their intention for the programme to conclude by the end of the year. This was no great surprise to analysts either.
However, euro traders latched on to the very cautious language used by Mario Draghi and the very long list of conditions that he expected to be met before the bond buying programme could be terminated. Should the bond buying programme continue because any of the conditions are not met, then any rate rise is pushed further into the distance.
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.