Euro strength thanks to dollar weakness and a cautious Bank of England sent the pound lower versus the euro on Thursday. The pound euro exchange rate tumbled to a nadir of 1.1046 in early trade before attempting to claw back ground across 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.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.|
It has been a busy week for pound traders and the data was still flowing on Thursday. First UK retail sales came in much higher than analysts were expecting. Retail sales grew by 3.8% year on year in November, well up on the 2.3% predicted. The jump was in part due to a strong boost received from Black Friday sales. As wages rise and inflation falls the UK consumer is under less pressure. This has enabled them to spend which is good for the economy and points to higher inflation down the line. News that could encourage the BoE to hike rates sooner rather than later.
|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.|
However, the BoE made it clear that Brexit uncertainty was preventing them from taking any action. Policymakers voted unanimously to keep rates on hold. The central bank also warned that Brexit uncertainties had “intensified” over the past month. With no idea as to whether the UK was going to crash out of the EU without a deal, or whether it would leave in a more orderly fashion, the BoE gave no guidance as to how data was shaping monetary policy. A very unusual move by the BoE. However, with no idea what Brexit will look like, planning monetary policy is close to impossible.
|Why is a “soft” Brexit better for sterling than a “hard” Brexit?|
|A soft Brexit implies anything less than UK’s complete withdrawal from the EU. For example, it could mean the UK retains some form of membership to the European Union single market in exchange for some free movement of people, i.e. immigration. This is considered more positive than a “hard” Brexit, which is a full severance from the EU. The reason “soft” is considered more pound-friendly is because the economic impact would be lower. If there is less negative impact on the economy, foreign investors will continue to invest in the UK. As investment requires local currency, this increased demand for the pound then boosts its value.|
Public sector net borrowing will be in focus today. Analysts are forecast a drop from £8 billion to £7 billion in November.
The euro was in favour on Thursday owing the selloff in the dollar. The euro trades inversely to the dollar. This means that when the dollar moves lower the euro tends to move higher. The dollar was moving lower following the Federal Reserve’s policy announcement on Wednesday evening.
Euro traders will now look towards the GFK Consumer confidence data. Analysts are forecasting that confidence will drop again in January after declining more than expected the previous month.
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