Pound Hits A 4 Week High vs. Euro Following Disappointing Eurozone Inflation Data

01.12.17
4 minute read
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The outlook for sterling improved again in the previous session. As a result, the pound pushed higher versus the euro for the third straight session. The pound euro exchange rate traded at €1.1393 for the pound, its highest level in almost a month.

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.

Investors continued to cheer progress in Brexit negotiations. Earlier in the week, the UK agreed to offer the full amount that the EU demanded for the Brexit divorce bill. The bill is an amount that EU wants UK to pay to cover for the financial losses Brexit might cause to the bloc. While this represented the clearance of a major obstacle in Brexit discussions, there are other points that have been problematic. These include EU Citizen rights and the Irish border issue.

On Thursday, reports suggested that there had been a significant breakthrough in Irish border negotiations. Of the three major sticking points in the first phase of Brexit talks, this would leave just one – EU Citizens Rights, where more progress would need to be made before the crunch EU summit in December. Pound traders are increasingly optimistic that the UK will hit the deadline and be able to move on to trade and transition deal talks. This second phase of talks would make a smooth Brexit more likely.

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.

While politics will remain the central theme for the pound, investors could take a second to look at UK manufacturing Purchasing Managers Index (PMI) data for November. PMI is an indicator that surveys purchasing managers at businesses for insights into sales, employment, inventory and pricing. Given the optimism surrounding sterling at the moment, a weak reading is unlikely to do too much damage to the price of the pound. However, a strong figure could give the pound another boost.

Eurozone data inflation misses the mark

The euro moved southwards versus the pound in the previous session, as inflation data disappointed euro investors. Eurozone inflation ticked up to 1.5% in November, up from 1.4% in October. However, it still missed analysts’ forecasts of 1.6%. The European Central Bank (ECB) has previously expressed unease over low inflation levels in the eurozone. Investors are now concerned that the ECB may adopt a more conservative approach to monetary policy, i.e be even less likely to raise interest rates, which weighed on the value of the euro.

Why do raised interest rates boost 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. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.

High impacting economic data is in short supply today. Instead investors will have to wait until next week when influential data points such as eurozone retail sales and GDP data could cause volatility for the euro.

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