GBP/EUR: Will Eurozone GDP Data Pull Euro Lower?

The pound showed resilience in the previous session, as it ended Wednesday’s session just 0.1% lower versus the euro. The pound euro exchange rate closed at €1.1420 amid increased Brexit nerves. The pair edged lower 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.

For example, it could be written: 1 GBP = 1.13990 EUR

Here, £1 is equivalent to approximately €1.14. This specifically measures the pound’s worth against the euro. 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.

Brexit nerves were once again weighing on demand for the pound in the aftermath of UK Prime Minister Theresa May’s Brexit plan B vote in Parliament earlier in the week. The House of Commons voted to send Theresa May back to Brussels to re-open negotiations over the Irish backstop arrangement, the most contentious part of the Brexit deal.

Clearly the re negotiation of the Irish backstop would also depend on Brussels being willing to join the UK back at the negotiation table. The message from the EU has been clear. There is no room for further negotiation. This message was repeated on Wednesday by Jean Claude Juncker, the President of the European Commission. He gave a stark warning that the UK’s attempt to re-open negotiations had greatly increased the chances of a disorderly, no deal hard Brexit.

The pound is shifting lower as investors start to accept once again that a no deal Brexit could still happen. This would be the most damaging option for UK business, the UK economy and therefore 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.

Data Drags Euro Southwards

The euro was also under pressure in the previous session, as data from the eurozone failed to calm nerves over the health of the economy across the region. Most notably German inflation was much weaker than analysts had been expecting. German consumer prices slipped -0.8% month on month as predicted. However, on an annual basis, inflation dipped to just 1.4% in January, down from 1.7% in December. Economists often consider German inflation a lead indicator for eurozone inflation. Weaker inflation means the ECB are less likely to raise interest rates. This weighed on the euro.

Today investors will look towards eurozone GDP data. Analysts are forecasting that economic growth has slowed to an annual rate of just 1.2% year on year in the fourth quarter. A significant decline from 1.6% previously. A weak print would fan concerns over slowing growth momentum in region.

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.

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