The pound euro exchange rate finished the previous week just a few points below where it had started. As the new week begins the pound edged cautiously higher versus the common currency hitting €1.11 as volume remains thin.
|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 GBPIn 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.
Movement in the pound was rather lackluster in the previous week. A light UK economic calendar and no Brexit or major political developments meant that pound traders had little to go on as they look ahead to the Brexit vote in Parliament in a few weeks’ time.
The pound has so far lost over 1.6% versus the euro across the month of December as investors remain on edge over the direction of Brexit. Brexit uncertainties and doubt surrounding UK Prime Minister Theresa May’s ability to lead her party, mean the pound has experienced one of its most volatile months. Little is set to change over the coming days to make the pound end 2018 in a more appealing position.
Investors are finding few reasons to buy into the pound right now. How Brexit will unfold is the biggest concern. Meanwhile, the UK economy is also being hit by Brexit uncertainties. Concerns are still rife that the UK could crash out of the EU without a deal or worse still, that the UK could find itself caught up in another general election.
|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 start of this week could still be slow. However, UK PMI manufacturing data will be released on Wednesday which is when analysts are expecting more investors to return to the markets.
The euro showed signs of resilience in the previous week. Even as the eurozone economy is showing signs of slowing in the year ahead, the euro managed to trade higher versus its peers. The strength in the euro has been principally thanks to weakness in the dollar as the US government is in shutdown, which left the dollar weaker. As the euro tends to trade inversely to the US dollar, this has been a key factor in euro strength.
The eurozone economic calendar will also see a low start to the week. This will pick up again come Wednesday with the release of the eurozone PMI manufacturing data. A weak reading will remind investors of the concerns over the eurozone economy and could bring the euro 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.
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.