Impressive UK retail sales data helped push the pound exchange rate back to €1.13 over the euro. This is the second time in a week that the pound has surged through this psychologically important number, and this is now the strongest rate at which the pound has traded against the euro in 2 months.
|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.
UK retail sales numbers shattered analysts’ expectations. Sales rose in volume by 1% in a month , up from 0.7% in July. City analysts had been forecasting an increase of a mere 0.2% in August. Further, this impressive growth rate came despite a large annual increase in prices. Looking at these numbers closely show that the volume of non-essential items sold increased at its fastest rate in 25 years.
These figures are surprising given that, when accounting for inflation, UK households are confronted with an increasingly tough economic climate of rising prices and falling wages. However, UK consumers are showing resilience by continuing to shop for non-essential items as well. This is good news for the UK economy, which is significantly dependent on consumer spending. Unsurprisingly, the release of positive UK sales data pushed the pound rate higher.
|Why does strong economic data boost a country’s currency?|
|Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.|
With no high impact data due today, pound investors will focus on Brexit developments ahead of UK Prime Minister Theresa May’s Brexit speech on Friday. The tone of Theresa May’s speech will be important especially since she is also expected to make an opening offer for how much Britain is willing to pay for its divorce from the EU. Clear signs that Theresa May is looking for a smooth transition period could boost the pound rate higher.
|Why is a smooth Brexit good for the pound?|
|A smoother Brexit would be a scenario in which the economic consequences of leaving the European Union are minimised. This is favourable for the pound because the less the Brexit impact on the economy, the more likely that foreign investors will remain interested in the UK. Foreign investors need sterling to invest in the country and so the more GBP is purchased, the higher the demand and, thus, an increase in the currency’s value.|
Economic data has been in short supply for the Eurozone this week. Instead, investors have been keeping an eye on the German elections due to take place on Sunday the 24th of September. German Chancellor Angela Merkel is widely expected to win, with Oddschecker putting her chance of victory at 97%. Given this high probability of Merkel winning her fourth Chancellorship, there’s little chance of any big changes from the euro in response to the result. At best, the EU’s common currency could drift higher early next week once the result is confirmed.
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