Brexit tensions, weak UK data and growing strain between Brussels and Rome dominated the markets attention on Wednesday. The pound edged lower versus the euro hitting a low of €1.1206.
|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.h 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 drifted lower as UK Prime Minister Theresa May held talk in Brussels. The Prime Minister scrambled to finalise the Brexit deal with European Commissioner President Jean Claude Juncker. However, tensions flared with France and Spain looking to intervene in aspects of the deal. The deal wasn’t completed, however Theresa May insists that negotiations have sufficient direction to resolve the last remaining issues.
Also weighing on the pound was data showing that the UK public sector finances in October were in the worst shape in since 2015. Public sector net borrowing grew by £1.6billion to £8.8 billion. This as much higher than the £6.2 billion that analysts had expected. Whilst tax receipts had continued to grow, government spending was up significantly. This data comes after the Chancellor increased spending at the Budget last month and will be a blow to the idea that public sector finances would strengthen going forward. The weak data sent the pound lower.
|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, Brexit will continue to be the principal driving force for the pound. There is no economic data due for release.
The euro remained resilient on Wednesday even as the European Commission (EC) accused Italy of “sleepwalking into insanity”. The EC took another step closer to sanctioning Italy after rejecting its controversial budget plans. Whilst the Italian government is looking to spend heavily in order to boost the slowing Italian economy. Brussels however, do no believe that adding more debt to an already heavily indebted country will help the economy. The EC are expected to fine Italy. There are some reports that Italy may soften its stance.
Today investors will be looking towards the release of the European Central Bank minutes from the monetary policy meeting. With the eurozone economy looking rather sluggish, investors will be watching for any signs from the central bank that they will push back on policy normalisation. Should investors get hint of a more dovish ECB then the euro could fall.
|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.|
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