GBP/EUR: Pound Tumbles vs. Euro As Brexit Project Fear Steps Up A Gear

As expected, the Federal Reserve cut interest rates on Wednesday. The euro US dollar exchange rate rallied for a third straight session. The pair closed 0.3% higher at US$1.1153, its highest closing level in 2 weeks. The euro is extending those gains in early trade on Thursday.

The euro was in favour in the previous session, despite a mixed batch of data from the bloc. German inflation fuelled concerns that Europe’s largest economy was slipping into recession. German inflation, as measured by the consumer price index (CPI) remained low in October, with prices increasing just 0.9% compared to a year earlier. This is significantly below the 2% target. German unemployment also continued to rise. The figures highlighted the struggles that the German economy is still facing, despite the European Central Bank taking action by easing monetary policy.

In September the ECB cut interest rates and restarted its bond buying programme. Even so, inflation in Germany has failed to pick up. The German government has also been reluctant to increase fiscal spending. Christine Lagarde will take over as ECB President on Friday and is part of a growing choir of voices putting pressure on eurozone governments to increase spending in order to shore up their economy.

Today investors will remain focused on inflation. Eurozone inflation figures are expected to show that prices in the bloc increased a lacklustre 0.7% in October compared to a year earlier. Such weak inflation figures could unnerve investors sending the euro lower.

Dollar Drops On Dovish Fed Comment

The US dollar dropped sharply lower in the previous session. The Federal Reserve cut interest rates from 1.75% to 1.5% as expected. This was the third rate cut this year by the US central bank since July. The Fed also indicated that has finished cutting interest rates for the time being, waiting for economic data to paint a clearer picture.

Given that the rate cut was expected by market participants, this isn’t what sent the dollar lower. The dollar lost ground after Fed Chair Jerome Powell said that the central bank would need to see a strong and persistent uplift in inflation before it would consider hiking interest rates. So, whilst no more rate cuts are expected for the moment, it could still be a long time until there is another rate hike. This weighed on demand for the dollar and continues to in early trade on Thursday.

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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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