The pound euro exchange rate traded flat in the previous session for most of the previous session. Investors digested an uncertain outlook from the Bank of England (BoE), in addition to concerning revelations regarding the Italian budget. The pound euro exchange rate closed at €1.1236.
|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.
BoE Chief Economist Andy Haldane highlighted the difficult position that the Bank of England was in when he spoke on Thursday. Mr Haldane said that the BoE could decide to raise interest rates or cut them if there was a disorderly Brexit. The action that the central bank will take will depend on the outcome of the Brexit negotiations. This complete level of uncertainty from the BoE regarding interest rates unnerved investors. As a result, the pound was broadly out of favour.
|Why do raised interest rates boost a currency’s value?|
|Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.|
Today investors will be focusing attention back towards the UK economic calendar. Analysts are expecting the UK economy to have expanded 1.3% year on year in the second quarter for the final reading. Analysts are not expecting a change from the previous reading and consider that the UK economy remained resilient in the second quarter. However, if the reading were to tick lower, the pound could be under renewed pressure.
Although the euro was evenly matched versus the pound, it traded broadly lower across the board. A disappointing batch of confidence figures set the euro off to a weak start in the previous session. Eurozone economic confidence declined by more than what analysts had been expecting. The sentiment index dropped to 110.9, below the 111.2 forecast and a fall from August’s 111.8 reading. Industrial confidence was also a notable weak spot as trade war tensions weighed on global demand.
|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.|
Italian politics were also unnerving investors on Thursday. The Italian government is making a last-minute effort to include its expensive election pledges into its spending budget. However, Italy already has a huge deficit. Italy needs the European Commission to agree its spending plan and it is likely to face resistance if it attempts to fulfil those pledges. The political uncertainty dampened demand for the euro.
Today inflation figures will once again be in focus. Analysts are predicting that eurozone inflation will hit move higher to 2.1% in September.
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