GBP/EUR: Will Eurozone Inflation Affect Pound vs Euro?

The euro slipped lower versus the US dollar across the session on Monday. The euro US dollar exchange rate dipped below US$1.09 to trade at the weakest level since May 2017.

The euro dropped lower following the release of German inflation data. German annual inflation fell for the third consecutive month in September. The German consumer price index, CPI, increased just 0.9% year on year in September. This is down from 1% in August and below the 1% figure that analysts were expecting.

This is the fifth month in a row that inflation has remained below the European Central Bank’s 2% target. The data confirmed that German inflation is now at the weakest level in almost three years and comes just weeks after the European Central Bank (ECB) eased monetary policy. Earlier this month the ECB restarted its bond buying programme and cut the overnight deposit rate in an attempt get more money flowing around the financial system. The ECB pledged to keep buying bonds until inflation was back up towards their target level of 2%.

Whilst German inflation was lacklustre, German unemployment figures were much more encouraging, suggesting that the slump in the manufacturing sector hasn’t yet spilt over into the service sector. Even so, market participants are still expecting Germany to tip into recession in the third quarter.

Investors will now look ahead to tomorrow’s eurozone inflation figures. Analysts are predicting that headline inflation will remain steady at 1%, but that core inflation will have increases from 0.9% to 1%. Any sign of weakness could unnerve euro investors. Investors expectation for a further rate cut from the ECB could increase, pulling the euro lower.


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 Rallies As Investors Look To Data Busy Week

The dollar was in favour on Monday and advanced versus its peers amid renewed trade tensions and a resilient domestic economy.

Whilst there is no high impacting US economic data due for release today, there are several key data points across the week. These include US manufacturing and service sector figures, in addition to Friday’s closely watched jobs report.


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.


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