The pound traded lower versus the euro on Thursday, as investors reacted to disappointing UK economic data. However, the pound faired better versus the euro than other currencies such as the dollar. This was because the euro also came under selling pressure over rising concerns over Italy. The pound fell 0.3% versus the euro, to close at €1.1366, snapping a three-day winning streak.
|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.
After a summer of heavy spending, UK consumers tightened their belts in September. As a result, UK retail sales declined by more than what analysts had been anticipating in September, according to figures published by the Office of National Statistics. Sales volumes dropped -0.8% month on month, down from an increase of 0.5% the month previous. A decline is spending was always anticipated, however market participants had been optimistic that the increase in wages and decrease in inflation may have encouraged the consumer to keep spending.
Retail sales are often considered an indicator for future inflation levels. Lower retail sales suggest lower future inflation. Lower future inflation means an interest rate rise is less likely, which dragged the pound lower.
|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.|
Brexit was also weighing on the pound as UK Prime Minister Theresa May said that she was willing to consider extending the post-Brexit transition period by a couple of months. This would be in order to break the current deadlock over the Irish border, which is preventing a deal from being achieved. However, it is also infuriating the Eurosceptics in her party, who could attempt to oust her. Brexit will continue to be a central driving force for the pound today.
Demand for the euro was broadly weak on Thursday as worries over Italy’s spending plans surfaced once again. Investors are growing increasingly concerned that there will be a stand off between Rome and Brussels over the Italian government’s proposed budget. The European Commission on Thursday said that Italy’s draft budget is a particularly serious breach of EU rules. This is a step towards preparing the way for an unprecedented rejection of a member state’s fiscal plan. The European Commission has written a letter to Rome asking for explanations by Monday. The political uncertainty is unnerving euro traders.
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