GBP/EUR: Euro Rises vs. Pound After ECB Meeting; UK GDP Under Focus

26.01.18
4 minute read
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The pound euro exchange rate fell on Thursday afternoon, in the wake of the first European Central Bank (ECB) meeting of the year. The pound euro exchange rate dropped over 0.5% on the day, hitting a low of €1.1412. At this level the rate is still hovering around a five-week high.

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 towards the pound weakened in the previous session, after data suggested that UK retailers had a difficult start to the year. Confederation of British Industry (CBI) data showed that retail sales slipped over the crucial Christmas period, confirming the worst festive period in terms of retail sales since 2014, as consumers struggled with falling wages in real terms and rising prices.

Although recent figures have shown inflation to have ticked down and earnings to have continued increasing, it is still far too soon for the consumer to feel the impact of these changes in their pockets. With this in mind, retail sales figures could remain weak for part of 2018.

Why does poor economic data drag on a country’s currency?
Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.

Today investors will gain further insight into the health of the UK economy, with the release of UK GDP data. City analysts are forecasting that UK economic growth will remain constant at 0.4% quarter on quarter. However, analysts are also predicting that the annualised figure will have fallen from 1.7% to just 1.4%. This decrease could unnerve investors and result in a sell off of the pound heading into the weekend.

Euro Stronger After ECB Inflation Optimism

As expected by city analysts, the ECB voted to keep interest rates on hold and its bond buying programme unchanged. Going into the meeting, there had been some hopes that ECB President Mario Draghi would present a more hawkish tone in the press conference given the solid economic expansion in the eurozone. However, Draghi clearly stated that it was too early to declare victory as he reaffirmed the central bank’s commitment to the QE programme.

There had also been concerns over how President Draghi would deal with the recent rally in the value of the euro. However, market participants were pleasantly surprised by the ECB’s increasingly optimistic outlook on inflation. Higher inflation means tighter monetary policy, so following the increased optimism the euro rallied.

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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