GBP/EUR: Pound Lower vs Euro As UK Manufacturing Sector Shrinks

12.04.18
4 minute read
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A barrage of disappointing UK economic data releases pulled the pound lower versus euro in early trade on Wednesday. However, the pound managed to claw back the losses later in the session, to head towards the close just marginally lower at €1.1464.

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 sunk lower in the previous session after a string of UK economic data came in weaker than what analysts had been predicting. UK manufacturing output unexpectedly contracted -0.2% month on month in February, ending the sectors yearlong expansion. UK manufacturing ad been boosted by cheaper pound and strong global demand over the last 12 months. However, there are signs that global demand is starting to wane as data from France, Germany and Italy have all pointed to a similar slowdown in manufacturing in the first few months of this year.

The construction sector of the UK economy also contracted in February, by a massive -1.6% month on month against analyst expectations of an increase in activity of 0.9%. The weak data points to UK economic growth losing pace in the first quarter of 2018. This is bad news for the pound which dropped lower following the releases.

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.

With no further high impacting UK economic data due to be released this week, investors will focus on speeches by Bank of England (BoE) policy maker Broadbent and Governor Mark Carney, both of whom are due to give speeches. Should monetary policy come up in the speeches and either indicate support for a May rate hike, the pound could rally.

Euro rallies then eases on ECB commentary

Demand for the euro initially increased as European Central Bank (ECB) Governor Draghi confirmed that he believed that wages and inflation for the bloc were on the verge of moving higher. This lifted hopes of a tightening to monetary policy for the bloc.

However, the boost in the common currency didn’t last long as the ECB distanced itself from hawkish comments made by a governing council member earlier in the week. The ECB confirmed that Ewald Nowotny’s comments were his own views and not representative of those the bank when he said that the ECB could be looking to hike next year. The unclear position of the central bank weighed on demand for the euro.

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 investors will keep focused on the ECB with the release of the minutes from the March meeting. Furthermore, producer price index figures could also create some volatility.

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