The pound edged higher versus the euro despite disappointing UK data and Brexit concerns. The pound euro exchange rate picked up from the flash crash to end 0.2% higher at €1.1088.
|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.|
UK Construction activity weakened in December, falling to a three-month low after hitting a four-month high in November. Unsurprisingly, Brexit was the culprit for the slowdown. Brexit uncertainties have caused commercial building projects to dry up, with most firms in a wait-and-see mood. UK construction PMI dropped from 53.4 to 52.8. The weaker data dragged on the pound.
|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 investors will be looking towards UK service sector activity data. The service sector is the most dominant UK sector, responsible for 80% of activity in the UK economy. Market participants will be watching carefully to see how the sector is holding under the strain of ongoing Brexit uncertainty. Analysts are expecting the service sector PMI to move higher to 50.7, up from 50.4 in November. Even if there is increased activity it is unlikely to give a strong boost to the pound whilst the Brexit impasse continues.
Brexit will also be moving under the spotlight as the deal is set to return to be debated in the UK Parliament. The pound could come under increased pressure as the Irish DUP party insists that it still has principle objections to Theresa May’s Brexit bill. UK Prime Minister Theresa May needs the support of the DUP to push the deal through Parliament or face a no deal, hard Brexit.
|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.|
A weak dollar helped boost the euro in the previous session. The dollar dropped as investors start to price in a Fed interest rate cut rather than a hike. Weak US manufacturing data and concerns over the global economy have meant that investors expect the Fed to cut interest rates rather than raise them this year. As the euro trades inversely to the dollar, when the dollar falls, the euro rises.
Whether the euro can hang onto these gains remains doubtful. Investors will be looking towards eurozone inflation data today. Analysts expect eurozone inflation to dip lower from 2% to 1.8% in December; the same month that the European Central Bank will end its asset purchase programme. Some investors are concerned that the ECB end the supportive monetary policy at the wrong time — just as the global and eurozone economy appears to be hitting trouble.
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