Eurozone growth remaining strong, combined with Brexit jitters sent the pound euro exchange rate lower on Thursday. The pound euro exchange rate dropped to a nadir of €1.1083 before lifting back over €1.1100 towards the close.
|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 southwards in the previous session, as investors shrugged off better than expected sales data from the Confederation of British Industry (CBI) and instead focused on renewed Brexit fears. The CBI released data showing that the UK consumers continued spending in August, with retail saLes unexpectedly increasing from July. Analysts had been expecting spending to have eased following the success of England in the World Cup. However, the prolonged hot weather ensured consumers continued to hit the high street.
|Why does strong economic data boost a country’s currency?
|Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.
Usually stronger than forecast data boosts the pound. However, investors were hit with a reality check after the UK government released papers on how to cope with a no deal Brexit. This once again increased market participants fears of the UK crashing out of the EU without a deal, which pulled the pound sharply lower.
|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.
Today there is no high impacting data, so investors will continue to focus on Brexit and the possibility of the UK not securing a Brexit deal.
The euro received a boost on Thursday after data showed a small increase in growth in the region. The pmi figures, which analysts considered a good gauge for economic health, increased in August to 54.4 from 54.3 the month previous. Whilst this is just a small nudge higher, August tends to be a quiet month given that so many factories close for the summer. However, the increase should reassure the European Central Bank as they look to raise interest rates next year. The data showed that the service sector in Germany provided a cushion for a cooling trend in manufacturing.
The ECB also released the minutes from the July meeting in the previous session which helped lift the euro. The central bank is increasingly confident in inflation reaching the 2% target set by the bank. Strong inflation often requires interest rates to rise.
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