GBP/EUR: Pound Strengthens Ahead Of Parliammentary Brexit Vote

Better than expected German trade data, plus optimism of increased German fiscal spending lifted the euro versus the dollar on Monday. The euro US dollar exchange rate rallied to a high of US$1.1068 before closing the session up 0.25% at US$1.10.47. The euro is edging lower in early trade on Tuesday.

 

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 EUR = 1.12829 USD

Here, €1 is equivalent to approximately $1.13. This specifically measures the euro’s worth against the dollar. If the U.S. dollar amount increases in this pairing, it’s positive for the euro.

Or, if you were looking at it the other way around:

1 USD = 0.88789 EUR

In this example, $1 is equivalent to approximately €0.89. This measures the U.S. dollar’s worth versus the euro. If the euro number gets larger, it’s good news for the dollar.

 

Data showing that German exports unexpectedly increased in July helped to lift the euro in the previous session.  Exports in July increased 0.7%, well above the -0.1% decline in the previous month. The improved trade balance will have offered some relief to export nation Germany’s economy. However, despite the solid reading, the outlook for the German economy remains weak.

The better than forecast data from Germany comes after a slew of downbeat data from Europe’s largest economy. However, reports that the German government could increase fiscal stimulus to boost growth also helped lift the euro. Market participants are growing hopeful that other governments in the bloc will follow suit, increasing fiscal spending to boost growth.

Fiscal spending creates inflationary pressures in the economy, which is good news for the euro. However, any gains in the euro could remained capped, as analysts also expect the European Central Bank to loosen monetary policy when they meet this week.

 

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.

 

 Dollar Gains As Concerns Over Chinese Economy Grow

The dollar dipped lower in the previous session as investors continued digesting the US jobs data. The weak headline job creation figure has meant that market participants are convinced that the Federal Reserve will cut interest rates when they meet next week. According to the Fed Watch tool investors are 91% certain that the Fed will cut rates by 0.25%.

Data out of China overnight showed that inflation at factory level is dropping.  Downbeat Chinese inflation is another sign that the world’s largest economy is slowing, amid the ongoing US — Sino trade dispute. As a result, investors are looking towards the dollar, the reserve currency of the world, for its safe haven status.

There is no high impacting US data today. Investors will look ahead to Thursday’s US inflation figures.

 

 

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