The pound fell steadily versus the euro on Wednesday. As good news was building for the eurozone, bad news was stacked up for the pound. The pound euro exchange rate dropped to a low of €1.1061. Sterling is edging higher in early trade on Thursday.
|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.|
As no deal Brexit planning picked up in the UK and the EU, pound traders were once hit by a bout of nervousness. Moves by both the UK government and the EU to step up no deal Brexit preparations makes a no deal Brexit seem more of a reality than it has been during negotiations. With the likelihood of Theresa May pushing her Brexit deal through Parliament looking close to arithmetically impossible, a no deal Brexit is increasingly more likely.
Investors briefly tore themselves away from Brexit developments to digest UK inflation data. However, this too was a disappointment. UK consumer inflation printed inline with analysts’ expectations at 2.3% in November, down from 2.4% the previous month. However, it is also representing a 20-month low as the price of petrol and clothing falls. Whilst softer inflation will ease the squeeze on the consumer, the Bank of England are more likely to push back on any interest rate hiking plans. As a result, the pound fell.
|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.|
The Bank of England will give its monetary policy announcement today. Analysts are not expecting the central bank to hike rates. Brexit uncertainty is taking the shine off strong wage growth, now at 3.3%. Whilst it is still unknown how the UK will leave the EU, deal or no deal, or if it will leave at all, it is almost impossible for the central bank to continue hiking rates.
Strong eurozone data and fading political woes in Italy meant that the euro was in demand on Wednesday. German producer price index (PPI) printed higher than what analysts were forecasting which lifted the euro. PPI measures inflation at wholesale level and economists often consider it a an indication of future consumer inflation.
The good news kept on coming. Italy and Brussels have come to an agreement ending the long running feud over Italy’s planned spending in 2019. The new plans see Italy’s spending at 2.04% of GDP, down from the original 2.4%. Investors consider this to be a more appropriate and sustainable level, which reduces the risk of another debt crisis in the region.
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