The Bank of England (BoE) lowering the growth outlook for the UK sent the pound sharply lower versus the euro on Thursday. The pound gave back gains from Wednesday, dropping to a low of €1.1215 versus the euro from a high of €1.1271. The pound slipped lower versus the euro 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. 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.|
As analysts forecast, the Bank of England voted unanimously to keep monetary policy unchanged. Key interest rates remain at 0.75%. The BoE didn’t join other central banks around the globe, such as the Federal Reserve or the European Central Bank, with a more cautious outlook. It did however acknowledge that “downside risks to growth have increased” in the UK and across the globe, citing trade and Brexit. The BoE reduced Q2 GDP forecast to 0 from 0.2%.
Whilst the BoE still sees the need for an interest rate rise in the coming years, should their forecasts bear out, they also acknowledged that the possibility of a no deal Brexit was on the increase. Furthermore, with Brexit delayed until 31st October the BoE doesn’t expect to see investment pick up before then. The overall tone was more cautious but stopped well short of the dovish sounding Fed and ECB.
Attention then moved to the Conservative Leadership battle. Brexiteer Boris Johnson will now face former Remainer Jeremy Hunt in the final stage. The results will be revealed in July. A win for Johnson could see the pound fall as fears of a no deal Brexit grow.
|Why is a “soft” Brexit better for sterling than a “hard” Brexit?|
|A soft Brexit implies anything less than UK’s complete withdrawal from the EU. For example, it could mean the UK retains some form of membership to the European Union single market in exchange for some free movement of people, i.e. immigration. This is considered more positive than a “hard” Brexit, which is a full severance from the EU. The reason “soft” is considered more pound-friendly is because the economic impact would be lower. If there is less negative impact on the economy, foreign investors will continue to invest in the UK. As investment requires local currency, this increased demand for the pound then boosts its value.|
The euro soared across the board on Thursday, thanks to a dovish Fed, making up for European Central Bank (ECB) inspired losses earlier in the week. The euro trades inversely to the US dollar. The US dollar tanked in the previous session after the Federal Reserve indicated that it might loosen monetary policy and cut interest rates. This was a dovish shift after the Fed had been insisting on remaining patient for the last few months.
The Federal Reserve effectively joined the ECB with a more cautious tone, enabling the euro to regain some of the lost ground from earlier in the week.
Today euro traders will turn their attention back to the eurozone economy for PMI data. German manufacturing activity will be watched closely as it remains deeply in contraction. Signs that the weakness in the sector is easing could help lift the euro.
|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.|
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