GBP/EUR: EU & UK Manufacturing To Drive Pound vs. Euro

After some volatility during the session on Tuesday, the pound euro exchange rate finished the day flat at €1.1218.

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 was broadly out of favour in the previous session as a lack of high impacting data left investors mulling over Brexit concerns. Foreign Secretary Jeremy Hunt once again warned of a no deal Brexit, by accident. With the clock ticking until the October deadline and no deal in sight, Mr Hunt urged France and Germany to force a sensible Brexit deal. With little else to focus on the pound came under pressure, as the prospects of a no deal, hard Brexit increases by the day.

Why is a “soft” Brexit better for sterling than a “hard” Brexit?
A soft Brexit implies anything less than UK’s complete withdrawal from the EU. For example, it could mean the UK retains some form of membership to the European Union single market in exchange for some free movement of people, i.e. immigration. This is considered more positive than a “hard” Brexit, which is a full severance from the EU. The reason “soft” is considered more pound-friendly is because the economic impact would be lower. If there is less negative impact on the economy, foreign investors will continue to invest in the UK. As investment requires local currency, this increased demand for the pound then boosts its value.

This week, so far has been relatively quiet for the pound, but that could change as from today. The UK economic calendar was empty at the start of the week but with purchasing managers index reports (pmi’s) and the Bank of England (BoE) interest rate decision coming up over the next few sessions, the pound could experience increased volatility.

Today the manufacturing pmi will be the principal focus. Analysts are expecting manufacturing activity to have eased in July to 54.2 from 54.4 in June. Analysts are expecting the survey to show that activity remains subdued. Strong global growth and trade lifted UK manufacturing last year, however trade war concerns and global growth losing some momentum has weakened UK manufacturing activity.

Eurozone Economic growth slows

Concerns over the health of the eurozone economy weighed on demand for the euro in the previous session. Economic growth in the eurozone slowed to 0.3% quarter on quarter, weaker than what analysts had forecast. This also represents the slowest second quarter GDP figure since 2014, as trade tensions hit exports.

The eurozone economy powered ahead in 2017, boosted by exports; however with current trade issues between the EU and the US, it is unlikely that exports will offer the same level of support to the eurozone economy in 2018.

Why does poor economic data drag on a country’s currency?
Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.

Eurozone and German manufacturing pmi’s will be in focus today. Whilst analysts are predicting that manufacturing remained constant in July, investors will be on edge looking for any trade related weakness.

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