GBP/EUR: Will German Inflation Pull The Euro Lower?

On a quiet trading day, the pound slipped lower versus the euro on Thursday. The pound euro exchange rate dipped to a low of €1.1310, before rising marginally towards the close. The pound is climbing cautiously higher in early trade on Friday.

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 drifted lower in trading in the previous session, as Brexit uncertainties continued to weigh on demand. The opposition party, Labour, have become more vocal in supporting a softer version of Brexit. However, the candidates for Conservative leadership are principally Eurosceptics. The increasingly polarised positions between the parties makes any agreement in Parliament over Brexit look increasingly unlikely.

Today is another quiet day as far as UK economic data is concerned. Investors will continue watching developments in Westminster as Tory leader candidates continue laying out their intentions for Brexit. With 11 candidates putting themselves forward, even the leadership battle could turn into chaos.

Nationwide house price data could offer some insight as the health of the UK economy today. When the economy is doing well, banks are lending and consumers feel confident buying houses. This pushes house prices higher. If consumers are less confident over the outlook for the economy they tend to be less willing to buy house, this pulls house prices lower and could bring the pound 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.

Euro Investors Look To German Inflation

With Germany and France closed for Ascension Day on Thursday, the euro remained quiet and stable. With no high impacting data the euro was reliant on political and global economic developments.

Today investors will look towards German inflation figures. Analysts are expecting German inflation to have ticked lower in May to 1.6%, down from 2% year on year in April. Investors are already nervous over the health of the German economy amid the global economic slowdown and Brexit. Manufacturing is in contraction, the service sector is showing signs of weakening and unemployment unexpectedly increased to the highest level in 2 years. Soft inflation figures would add to concerns over the eurozone’s largest economy and push back expectations of a rate rise by the European Central Bank.

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.

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