GBP/EUR: Comments From Bank Of England Drive Pound vs. Euro

The pound closed 0.4% higher versus the euro at €1.1361. This was the second straight week that the pound closed higher versus the euro as Brexit developments and Bank of England (BoE) comments pushed sterling higher.

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 in favour at the ends of the last week after BoE monetary policy maker Dave Ramsden made hawkish comments, suggesting that the BoE could raise interest rates sooners rather than later. Ramsden was one of the two policy members who voted against raising rates last November, however his comments show he has since shifted his stance. His comments boosted investors hopes that interest rates would increase possibly as soon as May.

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.

Today, there is little on the UK economic calendar to catch investor’s attention. Instead market participants will be digesting Brexit developments ahead of UK Prime Minister, Theresa May’s long-awaited speech “the road to Brexit” expected on Friday. Brexit negotiations last week brought fewer negative headlines than usual, which helped support the pound. Meanwhile a meeting between Theresa May and the Brexit cabinet appear to have put internal divisions behind them, in a rare show of unity.

Despite the unity in the cabinet, 10 Tory rebels have informed Theresa May that they will vote to halt Britain’s exit from the customs union with Europe. Should this happen, this could be a potentially disastrous rebellion for the Prime Minister, even more dangerous now Labour are saying they will support remaining in the customs union. Despite cabinet unity, the path for Brexit remains a very volatile and politically unstable one.

A quiet start for the euro

Last week the euro was broadly out of favour after eco stats across the week left investors disappointed. The euro could have a relatively quiet start to the week, given the lack of data due for release on the eurozone economic calendar. However, things will pick up as the week progresses, with a slew of data due to be released on Tuesday, including German retail sales figures and German inflation data.

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.