GBP/EUR: UK GDP & ECB Minutes To Drive Pound vs. Euro Trading

22.02.18
4 minute read
Tagged:

Then pound fell versus the euro in the morning session on Wednesday after weak UK labour data overshadowed weak eurozone numbers. However, sterling managed to trim those losses in the afternoon, to finish the day almost flat in the region of €1.1350.

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 unemployment rate in the UK unexpectedly ticked higher to 4.4% in the three months to December. Meanwhile just 88k jobs were created, far short of the 102k forecast. These numbers show that the tightening of the labour market eased going into December. This overshadowed the fact that earnings growth excluding bonuses increased marginally higher than forecast at 2.5%, compared to the 2.4% analysts had been expecting. However, the fear is that if the labour market is listening then wages will start declining going forward. The pound fell following the release.

How does strong jobs data boost the currency?
It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the good and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.

Bank of England governor Mark Carney, plus three members of the Monetary Policy Committee (MPC) appeared before the Parliamentary Treasury Select Committee to discuss the inflation report. During his appearance, Mark Carney signalled a more hawkish tone to rate setting, boosting hopes of an interest rate rise as soon as May. This sent the pound higher.

Today U.K. economic data continues to flow and today the focus will be on UK economic growth. Analysts are expecting UK fourth quarter GDP to show economic growth of 1.5% year on year and 0.5% quarter on quarter.

ECB minutes under the spotlight

The euro was generally weaker across the board, following disappointing eurozone manufacturing and service pmi’s. However, whilst the figures were slightly short of analysts’ expectations, indicating a loss of momentum in February, the eurozone economy continues to expand at a solid rate. The figures still show that the manufacturing and the service sectors remain firmly within expansion territory.

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.

This data will not have impacted on the European Central Banks position to keep interest rates low for an extended period of time. Today investors will be looking towards the minutes from the ECB monetary policy meeting for guidance. Any signs of the central bank adopting a more hawkish tone to policy could give the euro a boost.

This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.

TransferWise is the smart, new way to send money abroad.

Find out more