The pound plunged once again versus the euro in the previous week. The pound euro exchange rate dropped 1.8%. The pound hasn’t recorded a weekly gain versus the euro since last April. With lingering Brexit uncertainty hitting the UK economy, the pound has failed to hold its own even against the euro, which has struggled amid German recession fears. The pair is holding steady at €1.0738 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 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. |
At the end of last week the pound plummeted to its worst rate versus the euro in years as heightened U.K. recession and Brexit fears hit demand. Data showing that the U.K. economy unexpectedly contracted for the first time since 2012 unnerved investors. Furthermore, with Brexit still several months away there is a good chance that the U.K. economy will continue to slow in the third quarter. Two consecutive quarters of contraction is a technical recession.
Stockpiling for Brexit had helped the U.K. economy in the first quarter, however this was an unsustainable form of growth. With a recession potentially around the corner the Bank of England could be forced to cut interest rates to support a slowing economy. As a result, the pound dropped.
| 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. |
This week the UK labour report will be released on Tuesday. Wednesday sees the release of UK inflation figures. Brexit will remain the key driver of the pound. Any indication of how Brexit will develop when MP’s return after the summer recess could drag on or boost the pound. Current discussions are centred on whether Parliament is able to block a no deal Brexit.
Euro Investors Look To German GDP On Wednesday
The euro was surprisingly resilient in the previous week, despite growing concerns over the health of the German economy. Data on Friday showed that German exports had declined 8.8% year on year in July as Europe’s largest economy remains caught up in the US-Sino trade dispute. This was just the latest in a long list of data which points to a slowing German economy. Analysts are expecting a contraction in German economy in the second quarter when GDP data is released on Wednesday. Analysts are also predicting that the third quarter could also experience a contraction in economic growth.
The European Central Bank could look to ease monetary policy in September when they next meet, in a bid to support the slowing German and eurozone economies. Loser monetary policy expectations could limit any rally in the euro.
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