The pound euro exchange rate moved higher on Wednesday, snapping a three day losing streak. The pound initially slipped lower versus the euro. However, weak eurozone data hit demand for the euro hard, boosting the pound euro rate. The pair rallied to a high of €1.1438 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. 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 moved lower in early trade on Wednesday following disappointing inflation data. UK CPI fell to 1.8% in January, down from 2.1% the previous month. This is the first time in two years that inflation has fallen below the Bank of England’s 2% inflation target. The fall in inflation will be welcomed news for households, who have had their pay cheques squeezed by high inflation since the Brexit referendum. However, inflation below the BoE’s target will not encourage the central bank to consider hiking rates anytime soon.
|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.
British politicians are once again looking for ways to gain more control over the Brexit process. The main opposition party, Labour, have said that they will now back an amendment to delay Brexit if no deal is agreed by mid — March. Parliament was originally meant to be voting on Theresa May’s progress renegotiating the Irish backstop today. However, after her speech on Tuesday where she asked for more time and a meaningful vote on February 27th, it is unclear whether today’s vote will happen.
Despite continued Brexit uncertainty, demand for the euro was weaker than that for the pound. The euro fell quickly out of favour following weak eurozone data. Statistics showed that industrial production in the eurozone tumbled in January by -0.9% month on month. This was much worse than the -0.4% decline that analysts had predicted. On an annual basis industrial production contracted by -4.2%. This is the second straight month that production has fallen, highlighting the challenges that the bloc’s economy faces amid Brexit and slowing global growth. The weak figures fanned concerns over the health of the eurozone 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.
Today attention will remain on data and the release of the German GDP. Recent weak German data has fanned investor concerns that the German economy is heading towards contraction. Analysts are predicting growth of just 0.1% in Europe’s largest economy. Analysis are forecasting eurozone GDP to show growth of 0.2%.
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