GBP/EUR: Will UK and Eurozone Inflation Move Pound vs. Euro?

Signs that the German economy could putting its troubles behind it boosted the euro versus the pound on Tuesday. The pound euro exchange rate dropped to a low of €1.1546 before closing the session at €1.1558.

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.

The pound barely reacted to data which showed that the U.K. labour market continues to tighten. The unemployment rate remained steady at 3.9%. Wages grew 3.5% year on year in the three months to February. Wage growth for the previous month was also revised higher. However, there was an area of concern in the report. The number of jobless claims jumped to 28.3k, well above the 20k analysts forecast. The number of people filing for unemployment benefits has been steadily increasing over recent months. This could be an early sign that the tightening of the labour market could soon start to slow.

Still, the positives outweighed the negatives on the report. The fact that the pound didn’t move higher suggests that pound traders do not believe that the Bank of England will raise interest rates anytime soon, despite the stronger data. This of course is owing to Brexit.

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 investors will look towards U.K. inflation data for clues as to the health of the UK economy. Analysts predict inflation will tick higher to 2%, up from 1.9%. Stronger inflation could help lift the value of the pound.

Optimism Over German Economy Boosts Euro

Data pointing to a rebound in the German economy helped lift the euro in the previous session. The German ZEW sentiment index rebounded in March to 3.1, well above the 0.5 analysts had forecast. After a dire year for the German economy this data suggests that the worst could have passed.

The German economy has had a gloomy year as Brexit and the slowing global economy have hit demand for German products. However, yesterday’s data indicates that Germany’s manufacturing woes could be behind it. The stronger than forecast data lifted the euro.

Why does strong economic data boost a country’s currency?
Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.

Today euro investors will look towards inflation figures for the bloc. Analysts are forecasting that inflation will tick higher to 1.5%, up from 1.4%. Whilst an increase in inflation will definitely be a step in the right direction, inflation is still some way off the European Central Bank’s 2% target.

This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Inc., Currency Live or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. Consult our risk warning page for more details.

This article was initially published on from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.