GBP/EUR: Can Pound Rise For A Fourth Straight Session vs. Euro?

The pound continued to move higher versus the euro at beginning of the week. Strong UK manufacturing figures and fresh concerns over Italy pushed the pair 0.3% higher to €1.1282. This is the third straight session of gains for the pound euro exchange rate.

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 climbed northwards in the previous session. Investors turned their attention away from the UK Conservative annual party conference and focused on the UK economic calendar. UK manufacturing activity unexpectedly moved higher in September. Analysts had been expecting activity in the manufacturing to continue declining in September after a slump in the previous month. Instead the sector expanded at 53.8, up from 53 in August whereby any figure above 50 indicates expansion. The survey also noted that business sentiment had improved; an encouraging sign as Brexit looms closer.

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.

The UK Conservative party annual conference will remain on focus today. On Monday, the second day of the conference UK Brexit Secretary Dominic Saab said the UK was ready to listen to alternative ways of doing Brexit. His comments come after UK Prime Minister Theresa May’s Chequers Brexit plan has been attacked from all sides. Saab’s words showed that the UK was still keen to do a deal. This boosted the pound.

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.

Italy & Weak Data Hits Sentiment

Concerns over Italy and weak eurozone data kept the euro under pressure on Monday. The EU told Italy’s coalition government that it must stick to the bloc’s spending rules and have requested further details from Rome over its budget plans. This has unsettled the investors as a showdown between Italy and Brussels could now be on the cards. Talks are continuing in Rome. However, political instability within Europe’s fourth largest economy in unnerving euro traders.

In addition to the growing tensions in Rome, investors digested manufacturing data that missed analysts’ forecasts. Eurozone manufacturing PMI dipped to 53.2 in September, marginally lower than the 53.3 that city analysts had pencilled in. This is the lowest rate of expansion in the manufacturing sector for 2 years, providing a gloomy outlook for investors.

Today market participants will look towards inflation data at wholesale level. The eurozone producer price index will be closely watched after consumer inflation slipped lower last week.

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