GBP/EUR: Weak Data Weighs On Euro

The euro came under pressure in the previous session sending the pound euro exchange rate higher. The pair closed up 0.05% higher at €1.1160.

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.

Brexit uncertainty and recession fears prevented the pound from taking advantage of euro weakness in the previous session. With no fresh macro data to digest, investors continued mulling over last week’s hat-trick of disappointing pmi numbers, which point to a contraction in the UK economy in the second quarter.

Brexit remains front and central for pound traders. Over the weekend, Boris Johnson, favourite to win the Conservative leadership battle and takeover as prime minister, ramped up his no deal Brexit rhetoric. However, there is growing opposition in Parliament to a no deal Brexit. This is offering some support to the pound. Some MP’s have said they would resign in the event of a no deal Brexit. Others have said that they are looking at around 30 plus legislative options to prevent a no deal Brexit.

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.

Economists and business leaders have frequently discussed how damaging a no deal Brexit would be for the UK economy. Therefore, any sign that it could be avoided helps underpin the pound.

Today, there is no UK economic data for investors to digest. Instead they will look towards tomorrow’s GDP release, manufacturing and industrial production data. Signs of weakness could weigh on demand for the pound.

Euro drops on fears of German recession

Monday was not a good day for eurozone economic data. German industrial production figures showed that the sector declined by more than analysts were forecasting. Industrial production declined by -3.7% year on year in May, this was worse than the 3.2% decline forecast.

The weak data comes following last week’s soft German factory orders. The manufacturing sector in Germany, Europe’s largest economy is suffering as demand declines amid a slowing global economy. Fears are growing that the slowdown in the manufacturing sector will spread through the German economy sending it into recession. Eurozone investor sentiment index also dropped sharply.

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 eurozone economic data. Tomorrow is another quiet day. Thursday’s German inflation figure will be of interest. Analysts expect inflation to remain steady so this could offer some support to the common currency.

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