The pound extended its losses versus the euro in the previous session as the outlook for the British economy went from bad to worse. The pound euro exchange rate dropped to a 4 day low of €1.1124. The pair was steady in early trade on Thursday.
|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 UK service sector pmi, released on Wednesday, showed that the dominant sector stagnated in June making it a hattrick of grim pmi data across the week. The composite pmi index, which tracks the private sector, showed that activity the sector declined for the first time since June 2016. Economists believe that this indicates that the UK GDP will contract in the second quarter of this year.
Brexit uncertainty and concerns over the global economic outlook have caused a gradual deterioration in demand weighing on all sectors across the UK economy. With Brexit still several months away, the uncertainty is set to continue hitting UK economic growth across the coming quarter July to September. Two straight quarters of contraction is a recession. Risks are skewed to the downside and sentiment towards the year ahead is subdued at best.
The weak data has heaped pressure on the Bank of England to cut interest rates. As a result, the pound sunk lower.
|Why do interest rate cuts drag on 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. Lower interest rate environments tend to offer lower yields. So, if the interest rate or at least the interest rate expectation of a country is relatively lower compared to another, then foreign investors look to pull their capital out and invest elsewhere. Large corporations and investors sell out of local currency to invest elsewhere. More local currency is available as the demand of that currency declines, dragging the value lower.|
Today there is no high impacting data for pound traders to focus on. The pound could remain out of favour as investors continue to digest this week’s gloomy figures.
The euro was broadly in favour in the previous session after upbeat pmi figures from Germany and Italy. Germany has been a particular source of concern for euro investors as the global manufacturing slowdown has hit Europe’s largest economy hard. A better than expected service sector pmi for Germany shows that at least the German consumer is still underpinning the economy. German services pmi was 55.8 in June, up from 55.6 in May. A figure above 50 denotes expansion.
Investors will now turn their attention to eurozone retail sales. Analysts are expecting an increase of 0.4% month on month. The euro could extend gains if eurozone retail sales are strong. This is because analysts consider retail sales to be an indication for future inflation. Stronger sales should point to strong inflation. This is very important for the Eurozone where inflation is very low at 1%.
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