The previous session saw the pound pick itself up off an eight-year low versus the euro as jitters over North Korea were brushed aside and investors cheered the upbeat housing data for the UK. Heading into Thursday the pound was trading at €1.0860 versus the euro, after having tumbled as low at €1.0745 on earlier in the week.
The number of UK mortgage approvals surged by 3,400 in July, exceeding analyst’s expectation. This is important because it alleviates fears regarding the pace at which the housing market is slowing. If the housing market is still active then it shows that consumers are still willing and able to spend. This is good news for the UK economy, which is so consumer dependent and explains why the pound rallied.
|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.|
Pound traders will now look ahead to consumer confidence data. This figure measures the level of optimism that consumers feel about the state of the economy and their personal financial situation. When consumers feel confident they are more likely to spend more, which is good news for the economy. The figures for August are expected to show that consumer confidence dropped from -12 to -13. This decline in confidence would reflect concerns over the increasing cost of living and sluggish wage growth engulfing the UK economy post Brexit. Should the data show that optimism in the economy has dropped further, the pound could see its recent rally stopped in its tracks.
The euro enjoyed a strong start to the week. Following North Korea launching a missile over Japan, investors brought into the euro as the preferred safe -haven currency, sending the euro northwards. However, by Wednesday, investors had brushed off the event and the euro dropped as a result. Investors are now back to focusing on economic data to direct market movements.
Losses for the euro have been capped by strong German inflation data. Inflation in Germany, as measured by the core price index surged to 1.8% in August, up from 1.5% in July. Investors are hoping that this figure will increase pressure on the European Central Bank to tighten its monetary policy when it meets next Thursday. Speculation is running high that the ECB could begin discussing the winding down of its bond buying programme. However, it’s worth remembering that Germany’s inflation is higher than that of the rest of the eurozone, where inflations sits at just 1.3%, significantly below the ECB’s 2% target level.
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