The pound soared against the euro towards the end of last week. Better than expected UK economic data encouraged investors to buy into the pound. Meanwhile data from Germany came in slightly below analysts’ expectations which kept demand for the euro lower.
The pound rallied almost 0.8% versus the common currency on Friday, taking the pound euro exchange rate to €1.0963. This is the highest level that the pound has traded against the euro in three weeks.
The pound was driven northwards by a slew of better than expected economic data. Firstly, data showing that the trade deficit, the difference between exports and imports, unexpectedly shrunk. The trade deficit in July was -£2.87 billion, compared to -£2.91 billion in June. Although this isn’t a huge difference, the fact the it shrunk was sufficient to entice buyers of the pound.
The most significant data came from the National Institute of Economic and Social Research (NIESR), which predicted that the UK economy grew by 0.4% in the third quarter, up from 0.2%. The news was particularly well received given the weak readings for GDP that the UK has been producing across earlier quarters. Following the data, investors quickly brought into the pound.
|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.|
With no influential UK data on Monday, investors will look towards inflation data on Tuesday. Any signs that the cost of living is moving higher, could increase the possibility of an interest rate hike from the Bank of England.
Friday’s eurozone data was disappointing which kept the euro weak heading into the weekend. Germany’s trade surplus narrowed in July to €19.5 billion, from €22.3 billion. This means that whilst Germany continues to export more than it imports, there are signs of problems brewing. The problem lies with the strength of the euro, which is making German exports very expensive. As a result, Germany’s competitiveness has diminished, which is why the trade surplus has declined.
Investors will now look ahead to German inflation figures and eurozone employment figures on Wednesday for further insight.
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