The pound moved lower versus the euro again last week. The pound euro exchange rate dipped to a low of €1.1123 before picking up to close the week 0.1% lower at €1.1158. The pound was moving higher versus the euro 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. 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.|
The previous week was a downbeat week for both the pound and the euro, but ultimately the pound came off worse. The weeks poor data left investors more nervous about the health of the UK economy and speculating that the Bank of England’s (BoE) next move could be a dovish one. With the U.K. heading for a contraction in the second quarter and potentially a recession by the end of the third quarter, the central bank could be pressured into cutting interest rates to support the ailing economy. The BoE has signalled that a rate cut is now looking more likely than a hike.
|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.|
Pound investors were also become increasingly unnerved by the growing likelihood of the next prime minister leading the UK to a no deal Brexit. Both candidates Boris Johnson and Jeremy Hunt have indicated that if necessary, they would lead the UK in a worst-case scenario no deal Brexit.
With the Conservative leadership race continuing until late July, the pound is likely to remain under pressure. No developments are expected anytime soon. Investors will watch economic data to see whether the Bank of England will lean more towards cutting interest rates. Wednesday will be of particular interest with U.K. GDP, manufacturing and industrial production.
The euro was unable to capitalise on the weaker pound in the previous week. Soft eurozone retail sales and declining German factory orders left investors fearing that the European Central Bank (ECB) could adopt a more cautious stance over the coming months.
Christine Lagarde was appointed the new head of the ECB. This has also weighed on demand for the euro because investors consider Christine Lagarde to be a continuation candidate who will continue Mario Draghi’s supportive stance towards monetary policy.
The euro could remain under pressure this week as investors continue watching eurozone economic data for clues as to where the eurozone economy is heading. Today German industrial production and Eurozone sentiment index could move the euro. Weak figures could pull the euro lower.
|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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