GBP/EUR: Will UK Manufacturing & Industrial Production Drag Pound Lowe

The pound fell for the fifth straight week versus the euro. The pair dipped to a low of €1.1233, a significant drop from a high of €1.1733 reached at the end of April. The pound euro exchange rate was steady in early trade on Monday.

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.

Concerns over the health of the U economy amid continued Brexit uncertainty was one key reason for the pound’s selloff last week. Domestic political uncertainty was the other. Data showing that the manufacturing and construction sectors were in contraction unnerved pound investors. Whilst there was some relief mid-week for the pound, following stronger than forecast service sector pim, this was short lived. Analysts are not convinced that the rebound in the service sector will offset the large declines in activity in the manufacturing and construction sectors. As a result, analysts are expecting very sluggish economic growth in the second quarter. The weak data hit demand for the pound.

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.

UK domestic politics will remain under the spotlight this week. Movement in the pound could become increasingly erratic due to the increased domestic political uncertainty. The Tory party leadership battle officially commences this week after UK Prime Minister Theresa May has quit as leader of the party. With hard -line pro-Brexit candidates leading the race so far, the pound could drop lower on fears that the next Tory leader and Prime Minister will push for Brexit, no matter if there is a deal or not.

The pound could come under renewed pressure as investors turn their attention towards UK manufacturing and industrial production data. Analysts are expecting a month on month decline for both.

Euro Remains Strong Post ECB

Tensions rose once again between Italy and Brussels after the European Commission’s recommendation of disciplinary action to be taken against Italy over Rome’s refusal to adhere to the EU’S fiscal rule. However, the euro quickly recovered thanks to European Central Bank President Draghi sounding less cautious than what the market had been expecting. Investors cheered the more generous terms of the latest LTLRO funding scheme despite the fact that the central bank said that it won’t raise interest rates until the second half of 2020, 6 months later than when discussed in May.

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.

This week sees a quieter start on the eurozone economic calendar. Things won’t pick up until Thursday with German consumer confidence data and Eurozone industrial production. Further signs of weakness could send the euro lower.

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.