Pound Rises Versus the Euro As Political Uncertainty in Germany Continues

TransferWise content team
08.01.18
4 minute read

Pound traders have good news today. From a weak beginning during the early hours of Friday, the pound has been gaining slowly but consistently versus the euro, reaching to a high of 1.1277 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.

A new survey conducted by the organisation EEF and the insurance firm AIG found 40% of the manufacturing companies in the UK were expecting growth in 2018. The survey showed the British manufacturing industry is resilient, and showed business optimism even in the light of Brexit uncertainty. Stronger growth in export is expected to sustain even if the firms are nervous about the political uncertainty surrounding Brexit. What this shows is that the value of the pound is still strong, and investors will continue to invest in it, unless there is a lapse in Brexit negotiations and in the process of securing a good trade deal with the EU.

On Friday Germany's Deutsche Bundesbank released data concerning factory orders. This data measures shipments, inventories, and new and unfilled orders of Germany's manufacturing sector. The figures came in slightly lower than expected for month-on-month growth. Germany being the powerhouse of EU, this drop negatively influences investor sentiment in 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.

Political uncertainty in Germany continues to weigh on euro

Further, Germany continues to be without a new Government even after three months since the general elections. The political uncertainty seems to weigh upon the demand for the euro. Yesterday, the German Chancellor Angela Merkel said that she is hopeful that fresh coalition talks which will end the country's political stalemate. Investors will keep a close watch at these talks, which could significantly impact the value of the euro.

How does political risk have impact on a currency?
Political risk drags on the confidence of consumers and businesses alike, which means both corporations and regular households are then less inclined to spend money. The drop in spending, in turn, slows the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. Signs that a country is politically or economically less stable will result in foreign investors pulling their money out of the country. This means selling out of the local currency, which then increases its supply and, in turn, devalues the money.

A series of important economic data releases are expected from Germany today and tomorrow. This includes the German import figures, inflation data and industrial output numbers. A higher than expected reading on these indicators would boost the value of euro versus the pound, therefore weakening the value of pound versus the euro. However, today the UK will see the release the Halifax House Price Index which measures the health of housing sector. A higher than expected reading on this account will boost the value of the pound versus euro.

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