Euro hits yearly low against the pound as Hammack lifts the dollar

The euro slid to a fresh yearly low against the British pound on Monday, while the dollar firmed after a Federal Reserve official called for higher interest rates. FXStreet reports that EUR/GBP fell to 0.8445 as French political and fiscal concerns kept the euro under pressure.

On Friday the story was a dollar pause. That changed on Monday. Cleveland Fed President Beth Hammack said rates "need to be higher" and that inflation remains "too high", according to FXStreet. In a separate FXStreet report, she said the question is "how fast to make policy more restrictive." FXStreet also reports that the Dollar Index hit an 18-month high. In the ECB reference rates for 12 October, EUR/USD fell 0.22% to 1.1181, while GBP/USD rose 0.11% to 1.3235. Investing.com summed it up in a headline: "Pound edges up, euro slips as Fed bets back dollar".

What is a cross rate?

Most currency pairs are quoted against the US dollar. EUR/USD and GBP/USD are examples. A cross rate is an exchange rate between two currencies where neither one is the dollar. EUR/GBP, EUR/JPY and GBP/JPY are all crosses.

You can work out a cross rate from two dollar pairs. If you know how many dollars one euro buys, and how many dollars one pound buys, you can divide one by the other to find how many pounds one euro buys. The dollar cancels out.

This is why EUR/GBP can fall even when the euro and the pound both move against the dollar. What matters is how they move relative to each other.

A worked example

We use the ECB fixings. These are official reference rates, one per business day, not live quotes.

The formula is simple: EUR/GBP = EUR/USD ÷ GBP/USD.

1. 12 October: 1.1181 ÷ 1.3235 = about 0.8448. One euro bought about 0.8448 pounds.
2. 9 October: 1.1206 ÷ 1.3220 = about 0.8477.
3. Change: 0.8448 minus 0.8477 = minus 0.0029, or about minus 0.34%.

Notice what happened. The euro fell 0.22% against the dollar. The pound rose 0.11% against the dollar. Combine the two and the euro lost roughly a third of a percent against the pound. Our derived 0.8448 sits close to the 0.8445 low and the 0.8450 level FXStreet reported during the day.

The same method works with multiplication when the dollar sits on opposite sides. EUR/JPY = EUR/USD × USD/JPY = 1.1181 × 158.60 = about 177.33.

One caution: the fixing is a single snapshot. The 12 October fixing showed the pound up 0.11% against the dollar, yet FXStreet reported later in the day that sterling retreated about 0.11%. Prices keep moving after the fixing is set.

Why it matters for new traders

A cross rate tells you which of two currencies is stronger, with the dollar removed. On a day like Monday, the big headline was dollar strength. But the EUR/GBP chart showed a separate story: euro weakness tied to France. If you only watch dollar pairs, you can miss that.

Crosses also help you check whether a move is about one currency or about the dollar. If EUR/USD and GBP/USD fall by the same amount, EUR/GBP barely moves. That points to the dollar. If EUR/GBP moves a lot, one of the two currencies has its own driver. You can follow the EUR/GBP chart alongside EUR/USD to compare.

For more on the dollar side of Monday's session, see our sister site's report on the dollar's 18-month high after Hammack's comments. Looking ahead, investingLive notes the US CPI report on Wednesday and UK GDP on Thursday, both of which could move the dollar pairs and, through them, the crosses.

Key terms

• Cross rate: an exchange rate between two non-dollar currencies, such as EUR/GBP.
• Dollar pair: a pair that includes the US dollar, such as EUR/USD.
• Reference rate (fixing): an official rate published once per business day by the ECB, not a live price.
• Dollar Index: a measure of the dollar against a basket of major currencies.
• Year-to-date low: the lowest level since the start of the calendar year.