The pound traded lower versus the euro as weak data dented demand for sterling. Brexit news boosted the pound later in the session, however it was unable to hold those gains. The pound euro exchange rate hit a high of €1.1459 before closing 0.2% lower at €1.1391.
|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.|
The pound was out of favour in early trade on Monday following weak UK construction PMI. Data showed that the UK construction sector slowed almost to a halt in January. Construction sector activity dropped to 50.6 on the pmi index down from 52.8 in December. A figure of 50 separates expansion from contraction. Weakness in the construction sector comes following data showing a slowing manufacturing sector as Brexit uncertainty hampers progress and confidence across the economy.
|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.|
The pound briefly spiked higher in the afternoon, amid news that the UK will waive lengthy customs procedures for most EU imports in the case of a no deal Brexit. This is a measure that aims to keep Britain borders open and goods flowing. Whilst no deal Brexit planning has unnerved pound traders previously, this measure would be good for businesses at an otherwise challenging time. As a result, the pound strengthened.
Today, news of the Bank of England and the EU reaching an agreement over London based clearing houses in the case of a no deal Brexit, is offering some support. Investors will now look towards the service sector activity data. So far, figures are pointing to a slowing in the economy. The service sector is the dominant sector in the UK economy, signs that activity is drying up there, as well could send the pound sharply lower.
The euro was under pressure at the start of the week, hit by lingering concerns over the health of the economy. Eurozone sentiment data unexpectedly dropped sharply in February. Analyst had forecast a decline of -1.3, instead the index dropped to -3.7. This is the 6th straight month that confidence has declined. It has now reached a 4 year low. This is bad news for the economy because when investors lack confidence they hold back from spending, which slows the economy. With fears of the economy slowing intensifying, the chances of any rate hike from the European Central Bank will be pushed back. This is hitting demand for the euro.
|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.|
Today euro investors will look towards retail sales data. With consumer confidence declining, analysts expect retail sales to also fall lower.
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