The pound managed gain 0.2% versus the euro on Friday, however this was insufficient to put the pound on a positive finish versus the euro across the week. The pound euro exchange rate dropped 1% across the week hitting an eleven-month low of €1.1163. The pound is moving lower versus the euro as trading begins for the new 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.
The pound lost ground versus the euro in the previous week after a slew of weak data cast doubt over whether the Bank of England (BoE) will raise interest rates when they meet at the beginning of August. UK inflation is at a 12-month low, wage growth is slipping, and retail sales growth fell, which altogether will mean that the Bank of England could struggle to justify an interest rate rise. As the prospects of a rate rise declined, so did the value of the pound.
|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 the UK economic calendar is much quieter, which means that pound traders will look towards Brexit developments and domestic UK politics. The UK Parliament is due to head for a six-week summer break halfway through this week. However, there are still leadership challenge rumours circulating, which could continue to weigh on the pound. The latest polls show that only 16% of voters believe that Theresa May is handling Brexit negotiations well, whilst 34% say that they would prefer to see Boris Johnson, the now ex-foreign minister lead the country and Brexit negotiations. Any signs that Boris Johnson will make a move to take power could see the pound fall heavily.
|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.|
Whilst the euro moved higher last week against the pound, it was broadly lower versus other peers, as trade war concerns have weighed on demand for the common currency. Trump’s administration threatening tariffs on car imports from Germany has damaged business sentiment in Germany and the eurozone. This week sees an EU trade mission head to Washington for trade talks. Any signs that the US are willing to back away from imposing higher levies on car exports could help boost confidence in the eurozone.
Today investors will look towards consumer confidence for clues on the health of the eurozone economy.
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