GBP/EUR: Pound Trades Flat vs. Euro Despite Strong Eurozone GDP Data

15.02.18
4 minute read
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Not even data giving confirmation of solid eurozone economic growth helped boost the euro on Wednesday. Meanwhile Brexit headlines were the central focus for pound traders. The pound euro exchange rate closed the session on Wednesday more or less at the same level that it opened the session, at €1.1245.

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 traded marginally lower in the previous session, as investors digested a speech by the UK Foreign Secretary Boris Johnson over Brexit. The speech by Johnson, a hard-line Brexiter, is the first of several speeches, which are expected to set out what the government wants for the post Brexit EU UK relationship. However, the speech was lacking in substance and failed to even bring up the Irish border issue, which potentially threatens to derail any deal.

There will be more speeches in the coming days from heavy weight Brexit cabinet ministers, and UK Prime Minister Theresa May is due to speak at the weekend. Should these speeches show an increased desire for the UK to align itself closely to the EU, the pound will find itself supported. On the contrary, and ministers are showing an increased desire for a hard Brexit, the pound could fall heavily.

Why is a “soft” Brexit better for sterling than a “hard” Brexit?
A soft Brexit implies anything less than UK’s complete withdrawal from the EU. For example, it could mean the UK retains some form of membership to the European Union single market in exchange for some free movement of people, i.e. immigration. This is considered more positive than a “hard” Brexit, which is a full severance from the EU. The reason “soft” is considered more pound-friendly is because the economic impact would be lower. If there is less negative impact on the economy, foreign investors will continue to invest in the UK. As investment requires local currency, this increased demand for the pound then boosts its value.

Today there is no high impacting data on the UK economic calendar. Instead, investors will continue to digest Brexit headlines before retail sales figures on Friday.

Eurozone economy grows at 2.7%

After a quiet start to the week for the euro as far as economic releases were concerned, things started to pick up in the previous session. Fourth quarter GDP data for the eurozone printed as expected at 2.7% year on year showing that the strong momentum that carried the bloc’s economy through last year, showed no signs of abating.

Furthermore, eurozone industrial production jumped more than forecast in December, pointing to the fastest rate of economic growth for the bloc in over a decade, which analysts expect to continue into this year. The strong data pushed the euro higher.

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.

The eurozone economic calendar is quiet again today. In the absence of anything more heavy hitting, investors will look towards eurozone trade balance data for continued confirmation of a robust economy.

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