Strong UK economic growth and Brexit optimism sent the pound soaring versus the euro on Monday. The pound euro exchange rate jumped to €1.1240, its highest level in 5 weeks before edginglower.
|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 started the previous session on the front foot after data showed that the UK economy was growing at a faster pace than what analysts had been expecting. The UK GDP for July hit 0.3%, up from 0.1% in June and ahead of the 0.2% that analysts had pencilled in. The boost to growth came from the summer heat wave encouraging consumers to hit the shops and the strong performance by England in the world cup. Construction output hitting a record high also helped lift UK economic growth. The strong numbers lifted the pound.
|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.|
Brexit optimism was the biggest driver of the pound in the previous session. EU Chief Negotiator Michel Barnier said that he saw a Brexit deal being achieved in the next 6 — 8 weeks as a realistic goal. This news has come just in time for UK Prime Minister who has been under heavy political pressure from all sides of her party, but particularly the hard line Brexiteers.
There are still obstacles ahead and such a deal would still need to make it through the British Parliament, but a deal is now in sight boosting optimism that a hard, no deal Brexit can be avoided.
|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.|
The pound will remain in focus today as investors look towards average earnings figures, which analysts expect to have moved higher.
The euro was broadly in favour in the previous session amid a general improvement in market sentiment. The euro also received an unexpected boost from Michel Barnier’s words.
Investors will now turn their attention to data to be released today. The ZEW economic sentiment surveys will be closely watched. Analysts are expecting economic sentiment in Germany, the powerhouse of Europe to have ticked higher to -13.5, up from -13.7 in August. Whilst this is significantly above the low of — 24 reached in July as trade tensions hit confidence, it is still a long way below the long term average of 23. A weak reading could pull the euro lower.
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