GBP/EUR: Pound Drops Despite Impressive UK Labour Market Data

The pound finished lower versus the euro for a second straight session on Tuesday. Amid Brexit drama and impressive UK jobs data, the pound declined 0.1% to close at €1.1686.

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.

For example, it could be written: 1 GBP = 1.13990 EUR

Here, £1 is equivalent to approximately €1.14. This specifically measures the pound’s worth against the euro. 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.

UK data showed that the labour market was in good shape despite Brexit. Unemployment unexpectedly fell to 3.9%, the lowest level since 1975. Wages remained elevated at 3.4% for a second straight month, in the three months to January. Given that UK was 1.9%, households are enjoying strong wage growth in real terms. Economists consider this is an inflationary pressure. Therefore, it would normally lift the pound as investors believe a rate hike from the BoE will be sooner when inflationary pressures build higher.

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.

However, these are not normal circumstances. The pound moved briskly passed the impressive data, all consumed by Brexit headlines.

EU Chief negotiator laid down the rules for an extension to Article 50. Brussels has said that Theresa May will have until mid-April to decide whether she will apply for a lengthy extension, or whether she will attempt to get the UK Parliament to back her deal by July.

If she opts for the latter, and then fails to get her deal through Parliament, another extension would almost certainly be rejected. This is because of the European elections. The UK would sit the elections out meaning the seats go to other countries. This is a big risk. Alternatively, a lengthy extension would be toxic politically and economically in the UK.

Mixed German Economic Sentiment Keeps Investors Guessing

The ZEW German economic sentiment index produced mixed results. The medium-term outlook for economic conditions was less pessimistic than what analysts were expecting. However, the current assessment of the economy painted a bleaker picture than what analysts were forecasting.

Germany is the eurozone’s largest economy. Therefore, German data can strongly influence movement in the euro. The German economy is being hit by slowing global growth stemming from the US — Sino trade dispute and Brexit.

Today there is no high impacting eurozone economic data due to be released. Investors will be watching the US Federal Reserve monetary policy announcement. The euro tends to trade inversely to the dollar. A cautious sounding Fed could give the euro a boost.

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