GBP/EUR: Pound Snaps 4-day Losing Streak

Euro weakness following disappointing German data helped lift the pound euro exchange rate on Wednesday. The pound snapped a four-day losing streak and rallied to a high of €1.1584 before closing 0.4% up on the day at €1.1569.

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.

The pound traded marginally higher across the board but was significantly up against the weaker euro in the previous session. Public sector net borrowing dropped to a 17 year low to £24.7 billion, down some 41% from a year earlier. The figure was slightly above the Chancellor of the Exchequer’s target of £22.8 billion. However, the overall picture for public finances shows a steadily improving picture across the past decade, as the UK economy gradually recovers from the last recession. This is good news for the economy and therefore the pound.

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.

Despite encouraging data, Brexit uncertainty and domestic political woes kept any pound rally in check. Cross party talks between UK Prime Minister Theresa May and leader of the opposition Jeremy Corbyn have yet to show signs of any progress. In the meantime, Scotland’s First Minister Nicola Sturgeon is calling for another referendum on Scottish independence. The continued political instability is doing no favours for the pound.

With Brexit headlines set to dominate again, investors could briefly glance towards Confederation of Business Industry (CBI) business optimism figures. Analysts are expecting to see a slight improvement in April to -16, up from -23.

German Data Depresses The Euro

The euro was strongly out of favour in the previous session as investors reacted to poor data from Germany. The keenly awaited German IFO business climate indicator showed that business leaders were taking a gloomy view of the German economy. The indicator unexpectedly declined to 99.2 in April, from 99.7, the previous month. Business confidence has declined in seven of the last eight months, on top of that, the manufacturing sector has also deteriorated.

A poor German business climate index, combined with the weak eurozone consumer confidence that was released earlier in the week, paints a very gloomy picture for the eurozone economy. The European Central Bank (ECB) will struggle to find reasons to hike interest rates any time soon amid such weak data. This is keeping the euro depressed.

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.

There’s no high impacting eurozone data due for release today.

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