Pound Hits 4 Day Low vs. Euro; German Inflation Data in Focus

TransferWise content team
4 minute read

The euro continued to strengthen versus the pound on Thursday, pulling the pound euro exchange rate lower. Sterling tumbled 0.2% versus the common currency, taking the rate to a 4-day low of €1.1244 for the pound.

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.

The mood for the pound was generally upbeat, although slightly weaker than the mood for the euro. Pound traders cheered data released by the Confederation of British Industry (CBI) which showed that UK economic growth picked up in the 3 months to December. The report based on how industry output has changed over the previous three months, rebounded to +19 in December from +6 in November. November’s figure was the joint lowest level in over a year. The jump was more than what analysts and investors had been expecting, which supported the pound.

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.

However, the CBI also warned that the forward-looking component to the report points to a weaker outlook in early 2018. Consumer facing firms, especially retailers, are likely to be increasingly impacted by reduced spending, as weaker wages and increasing prices continue to weigh the consumer down.

Today no economic data for the UK is expected, neither are any Brexit related headlines due. Therefore, the pound could have a relatively quiet last session in 2017.

Euro Remains Firmly In Favour

The euro bounced high in the previous session after the European Central Bank released its economic bulletin report. The report comes just two weeks after the ECB policy meeting and continued with the message that economic expansion in the eurozone is broad based and that inflation will continue to rise. On a slightly more conservative note, the report also confirmed that monetary accommodation was still needed in order for inflation to return to 2%.

Today the euro could see further volatility as inflation data for Germany will be released. Analysts are expecting inflation in Germany, the powerhouse of Europe, to weaken slightly in December to 1.5% year on year from 1.8% in November. This could unnerve investors, as Germany usually serves as an indication for eurozone wide inflation. Investors are already concerned about the sluggish levels of inflation in the eurozone. When inflation falls the odds of an interest rate rise also falls, which pulls a currency lower.

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.
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