UK wages unexpectedly increasing sent the pound higher versus the euro in the previous session. The pound euro exchange rate rallied 0.3% to a high of €1.1244 paring losses from earlier in the week.
|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 rebounded on Tuesday following employment data from the Office of National Statistics. Data showed that the UK unemployment level remained steady at a 44-year low of 3.8%. Wages, however, unexpectedly jumped in the three months to April. Average wages increased 3.4% year on year, up from 3.3% in March and well ahead of the 3.1% that analysts had predicted. The pound rallied on the news. Strong wage growth usually indicates that spending and therefore inflation will pick up in the future.
|How does strong jobs data boost the currency?|
|It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the goods and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.|
With no UK economic data to focus on, investors are once again turning their attention to the domestic political scene. The Tory leadership battle officially started and there are 10 candidates who received sufficient support to continue to the first ballot. The candidates are a mix between those pushing for Brexit with or without a deal and those looking to squeeze further concessions from the European Union. Tellingly, Sam Gyimah who supported a second referendum failed to achieve the minimum support from his party to stay in the race.
The line-up indicates that the chances of a no deal Brexit could be on the up. Thursday’s first round ballot will provide further clues. Signs of the hard line, no deal Brexit camp winning could see the pound decline.
The euro was broadly out of favour once again on Tuesday as investors reacted to disappointing sentiment data. The eurozone Sentix investor confidence index drastically missed analysts’ forecasts. Whilst market participants had expected a moderate decline in the index, a slump from 5.3 to -3.3 caught investors by surprise.
The decline in sentiment adds to the gloomy outlook for the eurozone economy, which is showing signs of losing momentum in the second quarter.
|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.|
Today there is no high impacting eurozone economic data. Investors will be looking towards a speech by European Central Bank President Mario Draghi for further clues as to the next moves by the central bank. A cautious sounding Draghi could see the euro fall further.
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