The pound euro exchange rate remained fairly flat on Monday, close to the opening level for the week of €1.10. Lack of influential data kept demand for the pound soft, whereas unexpectedly weak eurozone data weighed on the euro.
Demand for the pound was fairly subdued in the previous session. Brexit anxieties weighed on sentiment. Furthermore, traders chose to remain on the sidelines ahead of UK retail sales data and inflation data to be released this morning.
UK inflation is expected to tick up in July from June, meaning that the cost of living is forecast to be on the rise once more. Should inflation be above the 2.7% pencilled in by analysts, then speculation of an interest rate hike by the Bank of England (BoE) could also increase. Any perceived prospect of the BoE tightening monetary policy and raising interest rates tends to boost the pound.
|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.|
Meanwhile, disappointing data from the eurozone capped any of the euro gains at the beginning of the week. Industrial output data for the bloc showed that industrial production slowed more than forecast at —0.6% on a monthly basis. This unexpectedly soft figure casts a doubt over the strength of the eurozone economy, which is weighing on demand for the common currency.
The strength of the dollar also weighed on the euro through the day on Monday. Geopolitical tensions eased after the weekend and demand for the dollar ticked up once more. The euro often trades inversely to the US dollar so as the dollar returned to favour with investors the euro lost momentum.
Eurozone GDP data is in focus at the beginning of the week. Analysts are anticipating a solid increase in economic growth for Germany this morning. Germany is the largest economy in Europe. Any signs of strength in the German economy will bode well for the GDP figures for the rest of the bloc, which are due to be released on Wednesday. A strong reading tomorrow could therefore boost the euro and keep the pound euro exchange rate sub €1.10.
|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.|
This article was initially published on TransferWise.com 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.