The pound euro exchange rate experienced volatility on Tuesday. The pound rallied on hopes of a second Brexit referendum and strong UK wage data. The euro also had a moment of strength following better than forecast sentiment data. The pound euro exchange rate hit a peak of €1.1413 before fading into the close.
|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.|
The pound rallied to session high’s on Tuesday as UK wage growth moved up to its highest level since 2008. Wages increased 3.4% in the three months to November. Unemployment unexpectedly fell to 4% from 4.1% in October.
With inflation now back below the Bank of England’s 2% target level, this latest move higher in wages represents a decent increase in real terms. This will offer some relief to British households which have been squeezed for months on high inflation and low wage growth. Finally, the position is turning, which will boost consumption; good news for the UK economy and the pound.
|How does strong jobs data boost the currency?|
|It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the goods and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.|
With no high impacting UK economic data due for release, pound traders will remain glued to Brexit headlines. On Tuesday, Labour, the opposition party tabled an amendment that could take Brexit back to the people for a second referendum to end the current deadlock in Parliament. This takes Brexit a step closer to never happening, which is good news for the UK economy and therefore good news for the pound.
|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.|
The euro enjoyed a brief rally before paring gains in the previous session. The closely watched German ZEW economic sentiment index pointed to investor sentiment stabilising in January after a difficult three months. Recent data from Germany shows that it only narrowly missed heading into recession at the end of last year. Global trade issues and Brexit are negatively impacting on the eurozone economy, which is hitting business investment and consumer confidence in Germany, the powerhouse of Europe and in the eurozone itself.
Today, analysts are expecting consumer confidence data for the eurozone to confirm that confidence dropped lower in January. This is bad news because when confidence is low, consumers are less likely to spend money which keeps the economy ticking over. Another poor reading will make it difficult for the European Central Bank (ECB) to justify raising rates later in the year, when they meet on Thursday.
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