Strong labour market data and dismal German sentiment figures sent the pound higher versus the euro on Tuesday. The pound euro exchange rate rallied to a high of €1.0810, before easing back slightly into the close. The pair is edging higher in early trade on Wednesday.
|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.
Data showed that the UK jobs market remained resilient in the three months to June. Employment stayed firm and wages grew at the fastest pace in 11 years. Wages increased a better than forecast 3.9%, up from 3.6% in the three months to May. Job creation was also ahead of analysts forecasts with 115,000 jobs created in the three months to June. A stronger labour market creates inflationary pressures and as a result lifted the pound.
|How does strong jobs data boost the currency?|
|It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the goods and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.|
However, the data is in sharp contrast to recent GDP figures which showed the UK economy contracted in the second quarter. Whilst jobs data is a lagging indicator there is no denying that the figures are strong. The Bank of England are unlikely to consider cutting interest rates whilst the labour market remains so resilient. Although, as ever this depends on Brexit.
Today investors will be focusing on UK inflation as measured by the consumer price index (CPI). Analysts are expecting UK inflation to have ticked lower in July to 1.9%, down from 2%. A stronger than forecast inflation reading could boost the pound further. This is because central banks look to hike rates in high inflation climates.
|Why do raised interest rates boost 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. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.|
Will German GDP Send Euro Lower?
Weak German ZEW sentiment figures sent the euro lower in the previous session. The German indicator of economic sentiment plunged to -44.1 in August, the worst level in eight years amid increasing concerns over the US — Sino trade dispute and the impact of a disorderly Brexit. This was significantly gloomier than the -28.5 that analysts had pencilled in.
Today German GDP figures could send the euro lower once more. Given the recent bout of dreadful data from Europe’s largest economy, analysts are expecting the German economy to have contracted in the second quarter by -0.3%. A weaker German economy could increase investor expectations that the European Central Bank will step in an loosen monetary policy when it meets in September. This could send the euro lower.
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