The price of the pound fluctuated versus the euro on Monday. After falling to €1.1102 the pound ended the session off the low at €1.1115. The pound was moving higher versus the euro in early trade on Tuesday.
|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.
Brexit developments unsurprisingly remain the key driver behind the movement in the pound. UK Prime Minister Theresa May faced a hostile Parliament on Monday as she promised MP’s that they would vote on her Brexit deal in the week starting January 14th. This was then swiftly followed by leader of the opposition party Jeremy Corbyn tabling a motion of no confidence in the Prime Minister.
However, due to a technicality that the no confidence is in the Prime Minister and not the government as a whole, Jeremy Corbyn is stopping short of taking a real shot at toppling Theresa May’s administration. He is unlikely to try until he is sure he can win, which leaves Brexit in deadlock still and pound edging higher as the risk of an immediate general election has pushed back.
|How does political risk have impact on a currency?
|Political risk drags on the confidence of consumers and businesses alike, which means both corporations and regular households are then less inclined to spend money. The drop in spending, in turn, slows the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. Signs that a country is politically or economically less stable will result in foreign investors pulling their money out of the country. This means selling out of the local currency, which then increases its supply and, in turn, devalues the money.
The euro traded broadly higher in the previous session. Its strength came from dollar weakness, rather than any improvements in the outlook for the eurozone. The dollar was trading lower at the start of the week as investors bet on the Federal Reserve planning fewer hikes across the coming year. The euro usually trades inversely to the dollar, so when the dollar is weaker the euro is usually trading higher.
Dollar weakness was so significant that the euro climbed northwards despite data showing that inflation in the region was slowing. Consumer price index showed that eurozone inflation dropped by more than analysts had been expecting to 1.9% year on year in November. This was down from 2.2% in October. With economic growth slowing and now inflation ticking lower the European Central Bank will be in no rush to raise interest rates.
|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.
Eurozone economic data will be under the spotlight once again today. Investors will be looking towards Eurozone business sentiment data. Analysts are predicting that business confidence will slide again in December as fears over the health of the eurozone economy continues.
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Inc., Currency Live or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. Consult our risk warning page for more details.
This article was initially published on TransferWise.com from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.