Strong UK economic data helped lift the pound higher versus the euro on Tuesday. The pound euro exchange rate reached at peak of €1.1326 early on. However, the pound was unable to maintain its strength and eased back towards the close.
|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.
Activity in the UK Construction sector unexpectedly increased in June, hitting a 7-month high. The Construction PMI jumped to 53.1 up from 52.5in May. This was ahead of analysts’ expectations of 52.5 and the third straight month of growth for the sector. Construction activity has rebounded solidly since falling sharply in April following a bout of snow. The data was a positive surprise for market participants after some disappointment from the manufacturing pmi earlier in the week. As a result, the pound pushed higher.
|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.|
Today investors will continue to focus on sector activity data, this time the dominant service sector will be under the spotlight. Analysts are expecting the service sector to have remained constant in June at 54, with any figure over 50 indicating expansion. Given that the service sector is so important in the UK economy, a strong reading today, combined with the strong construction pmi, could help persuade the Bank of England that the British economy is capable of sustaining an interest rate rise in August. In this scenario, the pound could rally.
Demand for the euro was slow on Tuesday as investors digested data which once more pointed to a slowing of momentum in the eurozone economy. Eurozone retails sales increased 1.4% year on year in May, down from 1.6% in April. The data was rather surprising given that unemployment in the bloc is falling and wages rising so consumers should have more money to spend. However, the data also pointed to rising energy costs meaning that consumers had less to spend on other goods and services, threatening to weaken economic growth. As a result, the euro fell.
Today investors will look towards the eurozone service sector pmi, which analyst forecast will remain constant in June at 55. Should the number print higher, the euro could receive a boost.
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