Concerns over political stability in the UK outweighed concerns over Spain’s political stability, causing the pound to tumble versus the euro this week. Sterling dived over 0.4% versus the common currency hitting a low of €1.1194. This is the weakest that the pound has traded against the euro since mid-September.
|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.
As investors continued to deal with UK Prime Minister Theresa May’s performance at the UK Conservative Party Conference, doubts are quickly gathering pace as to whether she will survive much longer as the Prime Minister. The problem was not the content, but the delivery of the speech, as May coughed and spluttered her way to the end. Reports have surfaced that a group of 30 members of UK Parliament are seeking to remove Theresa May from power. A leadership battle and political instability at this stage of Brexit negotiations is unnerving buyers of the pound. It could throw the already very tight Brexit time-table into disarray, meaning that a deal with the EU may not be reached at all.
|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.
The UK economic calendar is light today, however attention will now be directed towards the Bank of England (BoE) Chief Economist Andy Haldane who is due to speak. Despite voting to keep interest rates on hold, Haldane has previously revealed his belief that interest rates should rise before the end of the year. Investors will be curious to see if in light of the changing political landscape Haldane has turned more conservative in his ideas for monetary policy. Should this be the case, sterling could drop further.
The euro was also feeling the weight of political instability stemming from the independence vote in Catalonia. The euro was out of favour, once again trading lower against most of its major peers, except sterling. While the euro is trading lower, it has by no means plunged into an abyss. This suggests that fears regarding Catalonia among currency traders are moderate, as it remains very unclear as to whether the state can actually achieve independence from Spain. Not only is it very difficult to achieve international recognition as an independent country, but more so when less than half of Catalans voted.
High impact data is in short supply today, so any developments in the unfolding situation in Spain could keep demand for the euro subdued.
This article was initially published on TransferWise.com from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.