The pound soared 1.2% versus the euro on Friday to close at €1.288. This put gains across the previous week at 1.3%, as the pound continued its impressive March northwards. The pound has strengthened versus the euro for 5 straight weeks amid increased optimism that the UK will avoid a no deal Brexit. The pair is edging lower in early trade on Monday.
| 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. |
Sterling rallied on Friday following a report in the Times newspaper that the norther Irish DUP party could soften their red lines. Up to now the DUP, the government’s ally, have refused to accept any deal that treats Northern Ireland differently politically or economically from the rest of the UK. Should the DUP be willing to accept abiding by some EU rules post Brexit then a new Brexit deal could be possible. Whilst the DUP then denied the reports, pound traders clung to the hope of a new deal.
This week the focus will be on Brexit. There is a Bank of England monetary policy announcement on Thursday. However, the central banks hands are tied until there is more clarity over Brexit so moves may be limited.
Brexit Minister Steve Barclay will be meeting the EU’s chief negotiator Michel Barnier today. Boris Johnson will be meeting with outgoing European Commission president Jean-Claude Juncker and will make it clear he wants a deal. However, he is not willing to extend the Brexit deadline. Pound investors will be watching the headlines closely for signs of progress between the two sides.
| Why is a “soft” Brexit better for sterling than a “hard” Brexit? |
| A soft Brexit implies anything less than UK’s complete withdrawal from the EU. For example, it could mean the UK retains some form of membership to the European Union single market in exchange for some free movement of people, i.e. immigration. This is considered more positive than a “hard” Brexit, which is a full severance from the EU. The reason “soft” is considered more pound-friendly is because the economic impact would be lower. If there is less negative impact on the economy, foreign investors will continue to invest in the UK. As investment requires local currency, this increased demand for the pound then boosts its value. |
Euro Remains Strong Post ECB Loosening
The euro was broadly in favour across the previous week, although less so than the pound. The euro had a fairly muted reaction to the European Central Bank’s (ECB’s) decision to loosen monetary policy once again.
There is no high impacting eurozone economic data today. However, the euro could come under pressure as investors turn their attention to Tuesday ZEW economic sentiment data. There was a sharp decline in sentiment in August and investors will be wary of another steep decline in economic confidence, particularly in Germany, this month as the US — Sino trade dispute drags on. On the other hand, an uptick in sentiment could help the euro advance.
| 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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