The pound moved higher versus the euro on Thursday after a slew of disappointing eurozone economic data releases. The pound euro exchange rate closed 0.2% stronger at €1.1451.
The pound was showing some resilience on in the previous session despite no progress with Brexit and dismal consumer confidence data. Even though UK Parliament voted to send Prime Minister back to Brussels to renegotiate the Irish backstop arrangement in her Brexit plan, Brussels have remained firm in their position. They are not willing to re-open negotiations.
Instead, Theresa May is adopting a different tactic to attempt to push her deal through Parliament. She is trying to woo opposition party members by promising them greater workers rights following Brexit. She believes this could help her see her deal through. The prospect of a deal kept the pound relatively stable, even as data showed the impact of Brexit on the British public and the economy.
UK consumer confidence is at the lowest level in 18 months data showed. Brexit worries and concerns over the health of the global economy are dragging on sentiment. This is bad news because when confidence is low, consumers don’t spend as freely, which is bad news for the
|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 watching the UK manufacturing pmi. Analysts are expecting the data to show than manufacturing activity slowed in January. Activity had a strong end to the year; however, this was more down to stockpiling for Brexit rather than a significant increase in demand.
A barrage of disappointing data for the eurozone ensured the euro was broadly out of favour in the previous session.
German retail sales fell significantly short of analysts expectations. Retail sales declined -4.3% in December on a monthly basis and on an annual basis declined 2.3%. Whilst the effects of Black Friday in November will have impacted the data, there is a growing concern that low consumer confidence is preventing consumers from spending.
Italian GDP was also noticeably weak, fanning concerns over the health of the eurozone’s fourth largest economy.
Once again today is a day packed with eurozone data releases. Eurozone inflation will be the most closely watched. Analysts are predicting inflation will fall to 1.4%, down from 1.6%. As inflation continues to fall, the ECB will be less inclined to raise interest rates in Q3 as the central bank had originally hoped. A weak reading could pull the euro lower.
|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.|
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.