Weak inflation data from both the UK and the eurozone weighed on demand for the pound and the euro on Wednesday. The pound fell harder, pulling the pound euro exchange rate to a low of €1.1197.
|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 tumbled in the previous session as investors switched their attention back to the economic calendar. Data showed that inflation in the UK remained at a one year low in June. Instead of ticking higher to 2.6%, as analysts forecast, inflation remained constant at 2.4% year on year. Inflation was boosted by higher petrol prices and a weaker pound, however cheaper house prices and summer clothing sales put downward pressure on inflation.
With inflation at a 12-month low and wages growth slipping, the Bank of England (BoE) could struggle to find reasons to hike interest rates when they meet in two weeks. The softer inflation figure cast a doubt over whether the central bank will hike rates in Aug. As a result, the pound fell lower.
|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.
Today investors will look towards retail sales data to see whether consumers continue to spend. Analysts are expecting retails sales to have declined from May’s exceptional 4% to 3.7% in June. This would still be a respectable figure and could support a rate rise. A weaker figure could cast further doubts on the BoE’s ability to hike rates, which would send the pound lower.
Eurozone inflation ticked up in June to 2% year on year up from 1.9% in May. This means that inflation in the eurozone has now hit the European Central Bank’s target of 2%. Surging oil prices have played a key role, with energy prices around 8% higher. However, higher energy prices are masking a weaker underlying inflation. Core inflation which excludes more volatile items such a food and fuel slipped in June to just 0.9% down from 1% in May.
Whilst the European Central Bank (ECB) is not looking to raise interest rates until after the summer of 2019, investors still keep a close eye on the levels. Should the price of oil ease, then the price of fuel will ease and inflation could fall away quickly.
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