An upbeat UK wages report sent the pound higher on Tuesday. The pound euro exchange rate rallied to a peak of €1.1210. However, the pound was unable to hang on to those gains and closed flat at €1.1183. The pound is advancing 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.
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.
Data showing that the UK unemployment level dropped to a multi-decade low and that average weekly wages increased to an 11-year high, boosted the pound in the previous session. Data showed that the unemployment level fell to 3.8% in the three months to July, down from 3.9%. Meanwhile average weekly wages increased to 4% in July, with June’s reading also being upwardly revised to 3.8%. Strong wages create inflationary pressure in the economy. As a result, the pound advanced.
However, it was not all good news. The number of jobs created dropped to a dismal 31,000, well below the 115,000 reported in June. The weak job creation figure points to a slowing jobs market as Brexit approaches. This is unnerving investors and the pound gave up earlier gains on Tuesday.
There is no high impacting UK data due to be released today. Parliament is suspended for the next 5 weeks. Investors will watch closely any news flow on what Boris Johnson intends to do next and any headlines from the bi-weekly Brexit meeting. Any signs of progress towards a deal could boost the pound.
|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.|
Euro Investors Await Thursday’s ECB Policy Decision
The euro lacked direction in the previous session. An absence of relevant data ahead of the European Central Bank monetary policy meeting on Thursday meant investors had little to sink their teeth into.
Given the barrage of weak data that has come out of Germany recently, combined with the slowing eurozone economy, market participants are expecting that the European Central Bank (ECB) will loosen monetary policy to support the bloc’s economy.
Investors widely expect an interest rate cut and economic stimulus measures. However, over the past few days ECB policy makers such as France’s Villeroy and Estonia’s central bank President Muller, have cast doubt over the size of the stimulus package. These more recent comments are contradicting those of ECB President Draghi and Finland’s President Olli Rehn who have called for “impactful and significant” stimulus packages.
|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.|
Today there is no high impacting eurozone data. Euro investors will continue to look towards the ECB monetary policy meeting on Thursday.