After sinking to historic lows, the pound clawed back losses across the previous week. The pound euro exchange rate picked up from €1.0724 to end the week 2% higher at €1.0957, snapping a 14-week losing streak. The pound continued to move 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.
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.
A hat-trick of stronger than forecast data helped lift the pound higher across the previous week. Wage growth increased at the fastest pace in 11 years, inflation pushed above the Bank of England’s (BoE) 2% target and retail sales showed that the British consumer was still spending, unfazed by the upcoming Brexit deadline.
Last week’s data will no doubt have the BoE discussing about whether current monetary policy is appropriate given such strong data, or whether tighter policy through tightening interest rates would be more appropriate.
|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.|
This week there is no high impacting UK data due to be released, this could leave the pound vulnerable to Brexit rumours and headlines. Brexit is, after all, the key driving force behind the pound. The latest Brexit headlines show MP continue to look for ways to block a no deal Brexit. These include a cross party alliance of MP’s coming together under a national unity party should Boris Johnson lose a vote of no confidence, that political analysts expect to be called in early September.
The pound could come under pressure as investors digest leaked government papers which paint a bleak picture for the days, weeks and months following a disorderly Brexit. Trade disruption, medicine and food shortages as well civil unrest could follow.
|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.|
Will Eurozone Inflation Data Drag Euro Lower?
Concerns over the health of the German economy and fears of a recession weighed on demand for the euro across the previous week. Not only did data show that Germany’s economy contracted in the second quarter, but economic sentiment data showed that confidence was at its lowest level since 2011. A renewed escalation in the trade dispute between the US and China, Germany’s largest export markets has hit the already weakening economy.
This week sees a slew of high impacting releases for the euro. The first being today’s inflation data. Analysts are expecting eurozone inflation to have weakened in July, moving further way from the European Central Bank’s 2% target.
Currencylive.com is a site operated by TransferWise Inc. (“We”, “Us”), a Delaware Corporation. The content on our site is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or retain from, any action on the basis of the content on our site. Although we make reasonable efforts to update the information on our site, we make no representations, warranties or guarantees, whether express or implied, that the content on our site is accurate, complete or up to date. Some of the content posted on this site has been commissioned by Us, but is the work of independent contractors. These contractors are not employees, workers, agents or partners of TransferWise and they do not hold themselves out as one. The information and content posted by these independent contractors have not been verified or approved by Us. The views expressed by these independent contractors on currencylive.com do not represent our views.