GBP/EUR: Brexit & UK GDP Under The Spotlight

The pound declined early on last week, before recovering losses later in the week. The pound euro exchange rate closed the week at €1.1425 approximately the same level that it started the week.

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. 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.

In a week of two halves, weak data sent the pound lower on Monday and Tuesday of the previous week. Data showed that activity in the UK’s dominant service sector had almost slowed to halt, raising concerns over the health of the UK economy in the run up to Brexit. The Bank of England sent the pound northwards in the second half of the week. Despite a downward revision of economic forecasts, investors seized onto comments that the markets need not worry about a rate cut from the central bank just yet.

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.

Brexit headlines will continue to be in focus as Parliament is due to vote on 14th February. Political analytics are widely expecting Theresa May to ask for more time until 27th. Barring any Brexit curve balls, UK data will drive movement in the first half of the week.

The most important of the data releases will be today’s GDP reading. Analysts are expecting UK economic growth to have slowed to a halt quarter on quarter in the fourth quarter. Analysts are forecasting economic growth to have slowed to 1.4% annually, down from 1.5%. Should the reading be weaker than what analysts are predicting, the pound could fall lower.

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.

Will Eurozone Growth Fears Continue To Hit Euro?

The euro came under pressure in the latter part of the previous week following more weak data from Germany. Data from Germany has been particularly weak, fuelling concerns that Europe’s largest economy fell into a technical recession in the last quarter of 2018. A technical recession is when a country records negative economic growth for two consecutive quarters. The German economy is struggling in the face of Brexit and slowing global growth.

Also dampening demand for the euro last week was a downward revision for economic growth across the bloc.

The euro could have a quiet start to this week given a light eurozone economic calendar. However, the German GDP reading on Thursday will bring investor attention back to growth concerns. Investors will be hoping that Germany hasn’t fallen into recession.

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