The pound climbed steadily across the session on Thursday. A combination of Brexit optimism and Bank of England (BoE) positivity saw the pound hit a peak of €1.1406 versus the euro. This is the highest level that the pair has traded at since mid-October and is a 1% increase through the day.
|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 boosted by reports of a tentative deal between the EU and the UK over Britain’s financial services sector. Britain’s financial services firms play a crucial role in the UK economy. Therefore, news that these firms will be able to continue operating as they are, even in the case of a no deal Brexit is very supportive for the UK economy. A stronger base for the economy, lifted the pound.
The Bank of England also boosted sterling. The policymakers voted unanimously to keep rates on hold at 0.75%, as analysts had expected. BoE governor Mark Carney was more optimistic about the health of the UK economy than investors had been expecting. Mr Carney indicated that the pace of interest rate rises would be faster than initially predicted if the UK has an orderly Brexit. Hopes of a faster pace of rate rises lifted the pound.
|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.|
In the absence of any further Brexit news, investors will turn towards UK construction activity data, which is expected to remain steady in October. Any surprise to the downside could drag the pound lower.
Disappointing eurozone growth data, a stronger US dollar and persistent concerns over the tensions between Rome and Brussels are all factors that have contributed to the mood darkening towards the euro.
Data earlier in the week for the Eurozone was notably weak. Eurozone GDP data for the third quarter was softer than what analysts had been expecting, as was German retail sales figures. The weaker data weighed on demand for the common currency.
|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.|
Today manufacturing figures from Italy, France and Germany will be under the spotlight. Analysts are expecting activity in Germany and France to remain constant. However, analysts are predicting that manufacturing activity in Italy declined in October, moving into contraction. This could unnerve euro investors.
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