Pound Rally Versus Euro Pauses as Brexit and Catalexit Come into Focus

The pound soared versus the euro on Monday as UK political waters calmed. The pound jumped over 0.7% against the euro, hitting a day’s high of €1.1228 for sterling, before retreating to €1.1190 towards the close of the trading session.

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.

Calmer political waters in the UK supported the pound as it recovered some of last week’s steep losses. Investors relaxed over Theresa May’s future as the Prime Minister of UK and as political risk of a leadership turmoil in Britain receded, the pound pushed higher.

How does political risk have impact on a currency?
Political risk drags on the confidence of consumers and businesses alike, which means both corporations and regular households are then less inclined to spend money. The drop in spending, in turn, slows the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. Signs that a country is politically or economically less stable will result in foreign investors pulling their money out of the country. This means selling out of the local currency, which then increases its supply and, in turn, devalues the money.

With domestic politics falling into line, attention shifted back to Brexit. In a speech, May hinted towards leaving the EU with no deal. Her intervention came after Brussels rejected Britain’s €20 billion offer for the divorce bill. Brexit negotiations are in danger of stalling once again and it is now almost certain that talks won’t progress to stage 2 next week, which was the preferred date.

In stage 2 of the Brexit talks, discussions over a transition deal and future UK-EU trade deals can take place. However, in order to progress to stage 2, sufficient progress must have been made on stage 1 with the divorce bill. So far, the lack of progress is unnerving pound buyers and these hints from May regarding a no deal exit means that a smooth transition Brexit could be an impossibility. This would mean a cliff edge hard Brexit; the worst possible scenario for UK businesses and therefore for the economy. As pound traders toyed with the idea of a hard Brexit, the pound fell back from the day’s highs versus the euro.

Politics have been driving the pound for several sessions now. However, today sees the return of high impacting data on the UK economic calendar. Investors will look forward to manufacturing and industrial production data from the UK, due this morning.

Will Catalonia declare independence today?

Catalonia’s fight for independence continues to grab the headline and remains a central focus for euro traders. Some reports are spreading the news that the Catalan President Carles Puigdemont will declare Catalonia independent at a meeting of the regional government today. The overriding concern for euro traders is that the instability in Catalonia could adversely impact Spain’s already fragile economic recovery.

Catalonia makes up around 20% of Spain’s economic output so continued disruption to business there could have a noticeable impact on Spain’s economy. Any developments on this front today could weigh on sentiment for the common currency.

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