The pound advanced versus the euro on Monday as investors were able to put Brexit drama behind them. In a day which was notably absent of any macroeconomic catalysts, the pound climbed to €1.1603, before easing slightly towards the close.
|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.
With Parliament on recess for Easter, pound traders were able to put recent political drama and Brexit woes behind them. Macro-economic data was lacking at the start of the week, however it will start to pick up again today.
Today investors will look towards the UK jobs report. Analysts expect the UK unemployment rate to tick higher to 4%, up from 3.9% in January. However, investors will be paying more attention to the UK average weekly earnings component of the report. Analysts forecast that average weekly earnings increased to 3.5% in the three months to February. This will be some welcomed good new for pound traders.
With inflation hovering around 2% and average wages climbing, households should have more disposable income. This is good news for the economy. Higher spending means stronger inflationary pressure.
With Brexit kicked six months down the road, the Bank of England now has more freedom to consider hiking rates. Increasing inflationary pressure could encourage the BoE to hike interest rates. Therefore a strong reading today could lift the pound higher.
|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.|
The euro also suffered from a lack of macroeconomic catalysts in the previous session leaving it to drift marginally lower.
Today investors will look towards German ZEW sentiment data, a key gauge of investor confidence. In March economic sentiment improved in the largest economy in the Eurozone. Investors will be looking for a continuation of this trend.
The sentiment data will be the first of several high impacting releases across this week, including inflation data on Wednesday and pmi figures later in the week. After eurozone figures have shown continued weakness in the region for some time, investors will be watching closely for signs that weakness is stabilising. Analysts predict that sentiment will move into positive territory at 0.5 on the index, up from -3.5 in March. A strong reading could help lift the euro.
|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.|
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