GBP/EUR: Pound Rallies Higher as ECB Announces Stimulus Cut in Half

03.01.18
3 minute read
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Yesterday was a volatile day for pound euro trading. After the pound briefly took a plunge to 1.1217, it quickly rebounded. Sterling then soaring to 1.1287, matching its week high, before beginning the day on Wednesday marginally lower at 1.1286 over the euro.

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.

Yesterday was a big day for manufacturing pmi (purchasing manager’s index) data. Numbers were released for both the Eurozone and the UK. The Eurozone had a record-breaking month in December, which may be what caused the sharp drop in the pound after the release of several EU countries’ data. However, UK manufacturing growth also came out strong. Despite UK numbers coming in slightly lower than analysts anticipated, it was still 56.3 and the best 3 months growth for England since 2014, helping to rally the pound.

This manufacturing pmi is important as it tracks the activity of purchasing managers in the manufacturing sectors. If the numbers come out above 50, then the industries are expanding. Below 50 can spell bad news for investors. Traders pay close attention to these numbers as purchasing managers are assumed to have early access to their company performance data, and thus may be indicators of the overal health of a country’s economy.

Today, investors will look towards UK construction pmi which is expected to come in slightly lower than in December. If UK numbers fare better than expected, it could push up the pound even further versus the euro.

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.

EU set to cut stimulus spending in half to €30 billion

Though EU manufacturing pmi numbers came in strong, stronger than those in the UK, investors may be concerned over the European Central Bank’s (ECB) plan to halve its stimulus spending this month from €60 billion to €30 billion. Not only that, the ECB also revealed that the programme may not be extended beyond September, adding further concern.

With continually strong EU economic performance, it’s clear the ECB is facing growing pressure to drastically reduce spending. With stimulus spending cut in half, the EU’s growth will be put to the test. If this is the wrong move, it may mean that the EU, with its high debt and high unemployment in many member nations, may not be prepared for what’s coming and the economies may suffer.

Today the market will look towards German unemployment claims to help boost the euro. If unemployment claims in the strong EU nation come in better than expected, this could help.

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