The pound tumbled to a five-month low versus the euro on Thursday. The pound euro exchange rate dropped to a session low of €1.1168, as weak data cast further doubt over whether the Bank of England (BoE) will raise interest rates in August.
|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.
This week has been a difficult week for the pound, which has dropped around 1.3% versus the euro, as Brexit concerns and weak data have weighed on demand for sterling.
The latest data disappointment came from Retail sales. Retail sales, in June, fell very short of expectations. Instead of growing by 0.2% as analysts had predicted, retail sales fell by 0.5% month on month, a significant decrease from May’s 1.4% monthly increase. Meanwhile on a yearly basis, retail sale grew 3%, down from May’s 4.5% growth and short of analysts’ forecasts of 3.5% growth.
With inflation at a 12-month low, wage growth slipping and consumers staying away from the shops, the Bank of England could struggle to justify a rate rise when it meets in two weeks’ time. No data this week has been supportive of the central bank hiking rates. As market participants lowered their expectations of a rate rise, the value of the pound dropped.
|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.|
This week has been a busy week for the UK economic calendar and today the releases continue. To end the week investors will look towards the UK public sector net borrowing figures, which could cause some volatility.
Whilst the past week has been a difficult one for the pound, the euro hasn’t been in high demand either. A key inflation print for the eurozone missed its target on Wednesday, whilst persistent trade war fears are also keeping investors from buying heavily into the common currency.
Today German producer price index, a measure of inflation at factory level, could attract investor attention, especially given the slight miss in eurozone inflation earlier in the week. Inflation at factory levels tends to be an indication for consumer inflation levels further down the line. Therefore, signs of a decrease could cause investors to worry that eurozone inflation may fall again going forwards. When inflation is low the central bank will be less likely to hike interest rates.
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