The pound euro exchange rate was well matched in the previous session. Pound traders continued digesting weak data from earlier in the week whilst euro investors were faced with disappointing retail sales figures. The pound euro exchange rate closed the session at €1.1150, approximately flat on the day. The euro is heading lower in early trade.
|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 remained subdued on Thursday after a week of poor data and amid growing concerns of a recession. Activity data for manufacturing and construction had shown that the sectors were in contraction. The dominant service sector was also stagnating, driving fears that the UK economy contracted in the second quarter. Brexit concerns and demand being hit by a slowing global economy has brought the UK economy to a standstill. With the headwinds unlikely to ease over the coming months, the outlook for the third quarter is just as gloomy.
Today is another quiet day for UK economic data. Nationwide house prices could attract the attention of pound investors. Analysts are predicting that house prices declined -0.5% in June. A slowdown in house price growth would be yet another sign of Brexit concerning consumers, creating a slowdown in the housing market. When uncertainty increases in consumers are less likely to purchase houses and take on the risk of a large mortgage. A weak reading could drag the pound lower.
The euro was also broadly weaker on Thursday after Eurozone retail sales missed analysts’ expectations. Retail sales growth declined for a second straight month in May, declining from -0.1% to -0.3%. Analysts had forecast a rebound in sales of 0.3%.
Retail sales have been weak since February. Whilst consumer spending supported the eurozone economy at the start of the year, that is not looking to be the case in the second quarter. The weak reading could pile pressure on the European Central Bank to cut interest rates or release fresh stimulus to support the eurozone economy.
|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.|
The euro could come under further pressure today s investors look towards German factory orders. Analysts are forecasting a -6.3% decline in factory orders in May, following a -5.3% decline in April. These sharp declines could unnerve investors sending the euro lower.
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