The pound euro exchange rate traded within a narrow range in the previous session as demand for both currency remained strong. Although, there was little in the way of fresh news or data to give additional direction to either currency. The pound euro exchange rate continued to hover around the €1.1250 mark, a level which is has been trading close to since September.
The pound was trading strongly across the board as market participants continued to deal with reports from last week that some eurozone finance ministers are willing to push for a “soft Brexit” for the UK. Finance ministers from Spain and Holland both said that they are willing to work with the UK in order to keep Britain closely aligned to the EU after Brexit. This could mean keeping the UK within the single market and customs union. Both of which would be the best possible Brexit outcome for the UK economy and therefore the pound.
Today investors will turn their attention back to economic data. UK inflation data, in the form of consumer price index (CPI), is due this morning. CPI for December is expected to have dropped slightly from 3.1% in November to 3% in December. If the figure come in higher than what city analysts are forecasting, the pound could rally versus the euro. This is because higher inflation could boost the odds of the Bank of England raising interest rates.
How does political stability boost a currency?
Political stability boosts both consumer and business confidence, which means corporations and regular households alike are more likely to spend money. The increased spending, in turn, then boosts the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. For foreign investors to put their money into an economy, they need local currency. As they acquire the money needed, the demand for that particular currency increases, which then boosts its value.
Today, inflation figures in Germany will be under the spotlight. German inflation often serves as a good precursor for eurozone inflation which is due on Wednesday. Analysts are forecasting a reading from Germany of 1.7%. Inflation has been sluggish in Germany and the eurozone in recent months. Should the figure be lower than analysts expect, the euro could fall.