UK Parliament voted in favour of Boris Johnson’s Brexit bill but rejected his timetabling. The pound spiked briefly higher versus the euro before dropping lower. The pair closed down 0.3% at €1.1587.
British Prime Minister Boris Johnson’s Withdrawal Bill passed the first hurdle with 329 votes to 299. This gave way to a steady rise in the pound. However, it tumbled moments later after MP’s rejected the Brexit timetable by 322 to 308.
The first result means that the UK is a step closer to leaving the EU with a deal. The second result means that it will not happen by Boris Johnson’s “do or die” 31st October deadline. The pound could continue experiencing high levels of volatility until there is more clarity over what happens next.
The UK is now waiting for an extension to Brexit from the EU. There is still no guarantee that this will be given, although Donald Tusk has recommended it. A short extension could see some amendments and Brexit could pass in due course. This could be the most favourable option for the pound. A long extension could see a push for a new election by either Boris Johnson or the opposition. It also increases the likelihood of a second referendum. More Brexit uncertainty combined with domestic political uncertainty could see the pound slip lower.
Will Eurozone Consumer Confidence Weigh On Euro?
The euro also moved lower versus its peers following the Brexit vote. A Brexit deal is beneficial to the UK. However, it is also beneficial to eurozone economies as it reduces both uncertainty and risk.
In absence of other catalysts, euro investors will look ahead to eurozone consumer confidence figures. Analysts are forecasting that sentiment in the bloc dipped lower in October to -6.7, down from -6.5 in the previous month. Declining consumer confidence negatively impacts an economy. This is because consumers spend more when they are feeling confident and less when they are concerned over the outlook. Lower spending can slow an economy and inflationary pressures
Beyond today’s data is Thursday’s European Central Bank meeting. This will be ECB President Mario Draghi’s final meeting. Analysts are not expecting the central bank to ease policy after taking action just last month. Investors will be watching carefully for a more dovish stance.
| Why do interest rate cuts drag on a currency’s value? |
| Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Lower interest rate environments tend to offer lower yields. So, if the interest rate or at least the interest rate expectation of a country is relatively lower compared to another, then foreign investors look to pull their capital out and invest elsewhere. Large corporations and investors sell out of local currency to invest elsewhere. More local currency is available as the demand of that currency declines, dragging the value lower. |
| 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. |
