GBP/EUR: Pound Lower vs. Euro Despite High UK Inflation

The euro tumbled versus the dollar for a second straight week, last week. The pair fell 0.7% across the week to end at US$1.0940. This was only slightly up from the two-year low of US$1.0904 struck in early trade on Friday. As the new week kicks off, the euro is edging lower versus the dollar.

The mood for the euro soured  in the previous week as investors continued to digest the European Central Bank’s move to ease monetary policy. Earlier in the month the ECB announced that they will restart the bond buying programme and cut the overnight deposit rate.

Data last week, most notably the pmi readings from the eurozone and Germany, pointed to a slowing eurozone economy and a gloomy outlook. Today the euro could come under further pressure as investors look to German inflation figures. Analysts are forecasting that German inflation ticked lower to 1.3% year on year in September, down from 1.4%. Weakening German inflation will raise concerns over the health of the German economy and fuel fears that Europe’s largest economy is heading for recession. Under these circumstances the European Central Bank could be inclined to cut interest rates further.

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 Steady Awaiting Trade & Impeachment Developments

The dollar moved higher across the previous week. Whilst US data was generally positive, it failed to impress. However, the US dollar found support from sentiment, as risks increase investors look to the dollar for its safe haven status.

There were two main issues that dollar investors focused on last week; one was the US House speaker Nancy Pelosi announcing that the House would launch a formal impeachment investigation into President Trump.

The second was the US — Sino trade. Relations appeared to be improving between the two powers ahead of trade talks in October. However, a report on Friday that the Trump administration may move to limit investment in China will certainly raise tensions.

This week there is plenty of US data for investors to digest which will help them to assess the extent of damage that the US — Sino trade dispute is having on the US economy. Friday’s non-farm payroll data will be the most closely watched. Any signs that the US economy is slowing could unnerve investors.


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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