Strong data from both the UK economy and the eurozone meant that the pound euro exchange rate ended the day almost at the same level that it started on Tuesday. The pair reached a peak of €1.1263 and a low of €1.1204 before closing midway between the two.
|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 had a strong start to the previous session after investors cheered impressive UK employment data. Data from the Office of National Statistics showed that UK wage growth accelerated in the three months to July. UK wages increased 2.9% in the three months to July, ahead of the 2.7% for the three months to June. These figures support the BoE’s theory that tightening in the labour market is translating into higher wages for workers and therefore greater inflationary pressures.
|How does strong jobs data boost the currency?
|It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the goods and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.
Whilst this data is a step in the right direction the wage growth is actually much slower coming through than what the central bank and economists would have expected at 4% unemployment. Usually, when unemployment is this low, workers have an even greater bargaining power with wages.
The pound also received a boost from news that BoE Governor Mark Carney will extend his term to 2020. This means that he will no longer be leaving mid-way through the Brexit divorce and therefore offers an element of stability in what will be a very challenging period for the economy. As a result, Carney’s decision is seen as supportive for a smooth Brexit and therefore good the pound.
The euro was also broadly in favour in the previous session following the release of the ZEW Economic sentiment data. Investors were particularly pleased that ZEW German Economic sentiment improved by more than what analysts had been predicting. The sentiment index climbed to -10.6 in September, up from -13.7 in August.
The outlook for the German economy improved, even whilst the emerging markets currency crisis was happening in Turkey and Argentina. This shows that the fears in survey participants have declined slightly despite broader unfavourable circumstances.
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