The pound steadily strengthened against the euro in early trade on Tuesday, hitting a peak of €1.1504. This was the highest level that the pound has traded against the euro in two and a half weeks. However, later on in Tuesday’s session, demand for the euro jumped, pulling the pound euro exchange rate sharply lower.
|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.
Comments from Bank of England policy maker Ian McCafferty helped lift the pound in the previous session. Even though Mr McCafferty is a well-known hawk on the BoE monetary policy committee, his comments over more aggressive monetary policy helped boost the pound. He said that the BoE should not dally when it comes to tightening policy modestly which has left pound investors optimistic that a rate hike in May could still be on the table. Mr McCafferty voted for a rate hike in the previous BoE monetary policy meeting; investors are still uncertain what other policymakers think of raising rates in May but didn’t prevent the pound from receiving a boost from McCafferty’s comments.
|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.|
After a quiet week, so far, as far as economic data is concerned, today sees several high impacting releases, which could create some volatility for the pound. These include manufacturing and industrial production output data for February and Construction output data for February.
Policymakers were in focus in the eurozone as well. I the eurozone it was European Central Bank (ECB) governing council member Nowotny, who put the euro back in favour. Whilst the current ECB bond buying programme is still running and is due to run until September this year, Nowotny added that the governing council will decide in the summer what happens next. Furthermore, he added that if conditions were right we will have the possibility to reduce the programme significantly and head towards and end of the programme. This would pave the way for the ECB to hike rates for the first time since 2011.
Today the spotlight will remain on ECB members, this time with President Mario Draghi taking to the stage. Any signs of a less cautious Draghi could boost the euro further.
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