The pound euro exchange rate had a volatile session on Tuesday. The pair had a rollercoaster day moving from a session low to a high of €1.1125 to low, before rallying higher into 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.h 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 GBPIn 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.|
There were several factors which influenced the pound’s movement on Tuesday and which explains the volatility that sterling experienced. First off, disappointing construction data sent the pound lower. Construction activity slowed significantly more than analysts had been forecasting, dropping to 52.9 in August from 55.8 in July and well below below the 54.9 that analysts had been expecting.
|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.|
Construction activity and manufacturing activity both disappointed in August and analysts usually use these two readings as an indication as to what to expect for service sector activity data, which is released today. The service sector is the dominant contributor to the UK economy and analysts are expecting activity to have increased in August. Disappointing numbers in this sector spell trouble for the economy as a whole. This could pull the pound lower.
The pound received a last-minute boost in the previous session thanks to rumours circulating that the EU will offer encouraging words to UK Prime Minister Theresa May over her Chequer’s Brexit proposal. The evidence of progress should offer Theresa May some support as she faces rebelling Eurosceptic MP’s. However, Brussels is also expected to give a stern warning over the Northern Ireland border issue and will want a plan within weeks. Pound traders focused on the positives from the message and the hopes of a softer Brexit.
|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.|
Euro Softer Despite Strong PPI Data
The euro traded broadly lower versus its peers in the previous session despite inflation figures at wholesale level coming in slightly better than analysts had forecast. Stronger inflation, as measured by producer price index, often indicates a pick up in consumer inflation down the line. Higher inflation increases the chances of an interest rate rise. This usually lifts the value of a currency.
However, the euro was unable to move higher as investors continued to digest the disappointing manufacturing data from earlier in the week. Euro traders will now look towards today’s eurozone retail sales data. This data will give an indication as to whether consumers are spending; strong spending is a good sign for the economy and could lift the euro higher.
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