Pound Eases Back vs. Euro As Attention Shifts To BoE & ECB Rate Decisions

14.12.17
4 minute read
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The pound is trending higher versus the euro after a jump in UK wages. The pound euro exchange rate soared to a high of €1.1388 for the pound, its highest level since Monday, before easing back towards the close.

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.

Unemployment in the UK remained at a historical low of 4.3%, while UK wages moved gradually higher. According to the Office for National Statistics, average wages in the three months to October rose 2.5%, an increase from September’s 2.3%. Inflation in October was 3%, so wages are still undershooting inflation, however the gap is closing. This means the UK consumer should feel the squeeze on their purses ease slightly, which should be good news for the UK economy.

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.

Today attention will be firmly on the central banks, as the Bank of England (BoE) is due to give their monetary policy decision. Analysts are expecting the central bank to keep rates on hold, after hiking them last month. Investors will therefore be paying particular attention to BoE Governor Mark Carney’s policy outlook. Market participants will be keen to know where the central bank sees inflation going and what impact the Brexit deal will have on interest rates in 2018.

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.

ECB to keep rates hold & raise growth forecast

Capping the euro’s losses versus the pound on Wednesday was the release of positive eurozone industrial production data. The figures showed that the industrial production rebounded in October, growing by an impressive 3.7% year on year. Within the eurozone, Ireland was a standout performer, with industrial production jumping a massive 13.4%. The data beat analysts forecast and was a welcomed surprise after German industrial production unexpectedly dived to -1.4% in October.

Today the European Central Bank (ECB) will also give their interest rate decision. As with the BoE, analysts are expecting the ECB to keep rates on hold. They do not expect the ECB to raise interest rates until early 2019, when inflation is expected to hit 2%. Instead attention will fall on President Draghi and the ECB’s economic outlook after a stellar 2017. However, the central bank is expected to increase its growth projection for the bloc and this could offer a boost to the euro.

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