The pound rebounded off early session lows on Tuesday to finish the day higher versus the euro. The pound euro exchange rate rallied to a peak of €1.16, which is approximately where it closed.
Demand for the pound was relatively subdued as investors continue to wait and see what happens next in Brexit. Parliament has given its backing to Boris Johnson’s Brexit deal, but not to his plan to fast track it through Parliament.
The Tory party is deeply divided over whether to push for a general election or to attempt to try the Brexit deal again. Downing Street is awaiting the EU’s response on whether to grant the UK a Brexit extension. The European Union has left Boris Johnson hanging on to see whether they will grant a long or short extension. The French are pushing for a tight deadline until November 15th, whilst most countries want to give the UK three months. The length of the extension could determine the course of action Boris Johnson takes.
Draghi’s Final ECB Meeting
The euro lost ground in the previous session following the release of eurozone consumer sentiment data. Consumer confidence fell from -6.5 in August to -7.6 in September, the lowest level of the year. The weak reading raised concerns that the slump in manufacturing is spreading into the consumer sector. The weak data weighed on demand for the euro.
Today will be a busy day for euro investors. First up will be PMI data. Following yesterday’s weak consumer sentiment figures, investors will be keen to see how activity is holding up across manufacturing and the service sectors. Analysts are expecting an uptick across the board which could boost the euro.
Today the European Central Bank will give its monetary policy announcement. This is Mario Draghi’s last meeting as President before he will be replaced by Christine Lagarde in November. The ECB eased monetary policy last month. Analysts do not expect the central bank to cut rates again today. Investors will still be listening closely to see if the ECB adopts a more dovish stance.
| 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. |
| 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. |
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