GBP/EUR: Pound Drops Versus Euro As Honda Announces Exit From UK

The pound moved higher versus the euro on Monday despite a Labour breakaway party forming. The pound euro exchange rate spent much of the day trading close to the flatline before edging higher towards the end of the day. The pair closed flat at €1.1424 and is moving lower in early trade on Tuesday.

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 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.

There was no high impacting UK economic data on Monday, leaving investors to focus solely on UK politics and Brexit. The big news was the forming of a Labour breakaway party called Independent Group. Parties breaking away from the main UK political parties is rare, but it is not in itself damaging for the pound. However, there are some particularities about this breakaway group which could be negative for the pound longer term.

The breakaway party is in favour of a second Brexit referendum and is also against the Labour leader Jeremy Corbyn. This combination could actually be a fatal blow for the second Brexit referendum campaign. Any second referendum will be closely linked to this breakaway party making it close to impossible for Corbyn and Labour to support it. As a result, a second referendum is less likely, which is pound negative.

Honda announcing they will close their UK manufacturing plant over Brexit uncertainty has hurt the pound this morning. Honda are joining a growing list of firms that are looking to leave the UK.

UK jobs data is released today. Analysts are expecting unemployment to remain steady at 4%. More importantly, analysts are expecting average earnings to increase to 3.5% in December, up from 3.4% in November. This would boost the pound.

How does strong jobs data boost the currency?
It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the goods and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.

Eurozone Economic Sentiment Data In Focus

The euro was in demand in the previous session. However, this was more owing to a weakening dollar rather than any particular euro strength. The euro trades inversely to the dollar so when the dollar declines the euro rallied. The dollar was moving lower once again as optimism increased that progress was being made in US — Sino trade talks. Given the dollar’s safe haven status, when geopolitical tensions increase so does the dollar and vice versa.

The euro has broadly been out of favour across the start of the year as concerns of the health of the eurozone economy increase. Today investors will look towards the ZEW economic sentiment data. Signs that sentiment is softening as the eurozone economy loses momentum could send the euro 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.

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