The pound euro exchange rate ended Wednesday almost at the same level that it started at €1.1245 The pound received a boost from strong data, whilst the euro rallied after constructive trade talks between the US and the EU.
|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 moved higher in the previous session after data from the Confederation of British Industry (CBI) showed that consumers are spending. The CBI retail sales showed that stores enjoyed robust retail sales growth in July as the hot weather that lifted sales to a nine-month peak in June, continued to lift demand.
These figures will be encouraging for the Bank of England which is due to meet in one weeks’ time, to decide whether or not to hike interest rates. The numbers support the BoE’s theory that the slowdown in the first quarter of the year was temporary and that the economy rebounded in the second quarter. Stronger retail sales often point to higher inflation down the line. Higher inflation means an interest rate hike from the central bank is more likely. As a result, the pound was well supported across the session.
|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 euro was also in demand after news broke that President Trump and EU Commission President Jean- Claude Juncker had reached an agreement on trade. Juncker has travelled to Washington in the hope of de-escalating the growing trade tension between the US and the EU after President Trump threatened to place tariffs on European automobiles.
According to reports the EU have agreed to import more soybeans while reducing industrial tariffs. New trade talks will begin between the EU and the EU to avoid a trade war. The euro moved higher.
Today investors will be focusing on the European Central Bank monetary policy decision. The ECB are expected to keep rates on hold. The central bank announced the end of the bond buying programme last month and also update their forward guidance. Therefore, today’s meeting could be quiet compared to last months.
Investors will be listening for Draghi’s ideas on how the global trade war could impact on the eurozone, although after the meeting with Trump, that conversation could now be different.
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