Pound Steady vs. Euro As Investors Prepare for UK & German Inflation Data

16.01.18
4 minute read
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The pound euro exchange rate traded within a narrow range in the previous session as demand for both currency remained strong. Although, there was little in the way of fresh news or data to give additional direction to either currency. The pound euro exchange rate continued to hover around the €1.1250 mark, a level which is has been trading close to since September.

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 pound was trading strongly across the board as market participants continued to deal with reports from last week that some eurozone finance ministers are willing to push for a “soft Brexit” for the UK. Finance ministers from Spain and Holland both said that they are willing to work with the UK in order to keep Britain closely aligned to the EU after Brexit. This could mean keeping the UK within the single market and customs union. Both of which would be the best possible Brexit outcome for the UK economy and therefore the pound.

Today investors will turn their attention back to economic data. UK inflation data, in the form of consumer price index (CPI), is due this morning. CPI for December is expected to have dropped slightly from 3.1% in November to 3% in December. If the figure come in higher than what city analysts are forecasting, the pound could rally versus the euro. This is because higher inflation could boost the odds of the Bank of England raising interest rates.

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.

Germany on Track for 2nd Grand Coalition

Political developments in Germany have been central to the euros strength at the end of last week. The German SPD party has agreed to a coalition deal with Chancellor Angela Merkel’s CDU party. There had been some discontent from senior SPD leaders over the agreement, however, these senior members were quickly silenced. The prospect of the political vacuum ending in Germany after many months is encouraging for euro traders. Furthermore, Germany was previously ruled by a “grand coalition”, so another grand coalition should mean continuation in terms of economic policy, which is will also please euro traders

How does political stability boost a currency?
Political stability boosts both consumer and business confidence, which means corporations and regular households alike are more likely to spend money. The increased spending, in turn, then boosts the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. For foreign investors to put their money into an economy, they need local currency. As they acquire the money needed, the demand for that particular currency increases, which then boosts its value.

Today, inflation figures in Germany will be under the spotlight. German inflation often serves as a good precursor for eurozone inflation which is due on Wednesday. Analysts are forecasting a reading from Germany of 1.7%. Inflation has been sluggish in Germany and the eurozone in recent months. Should the figure be lower than analysts expect, the euro could fall.

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