Pound Closes At 1.13 vs Euro On Brexit Hopes And German Concerns

The pound euro exchange rate traded over 0.5% higher on Monday, as the dust started to settle following the collapse of the German coalition talks. The pound hit a one week high of €1.1290, before easing back into the close.

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.

Demand for the pound was buoyant in the previous session as investors remained optimistic that the UK could be close to a breakthrough in the deadlocked Brexit negotiations. Rumours continued to circulate that the UK Prime Minister Theresa May was on the verge of increasing her offer for the Brexit divorce bill to €40 billion. The divorce bill is an amount that the bloc wants UK to pay for the losses that the Brexit might cause. Theresa May’s offer would close the gap on the €60 billion that the EU is demanding and could lead to Brexit negotiations moving forward to transition deal discussions, making a smooth Brexit more likely.

Why is a smooth Brexit good for the pound?
A smoother Brexit would be a scenario in which the economic consequences of leaving the European Union are minimised. This is favourable for the pound because the less the Brexit impact on the economy, the more likely that foreign investors will remain interested in the UK. Foreign investors need sterling to invest in the country and so the more GBP is purchased, the higher the demand and, thus, an increase in the currency’s value.

Today investors will be looking towards October’s borrowing figures before the UK Chancellor, Philip Hammond, presents his Budget to Parliament on Wednesday. The UK government borrows money when it’s tax revenues are insufficient to pay for spending, creating a budget deficit. City analysts are expecting the UK deficit to have widened to -£6.6 billion last month, from -£5.3 billion the month before. Should this be the case, then the Chancellor will have even less room to manoeuvre as he lays out his plan for the year ahead.

The Autumn Budget, is without doubt the key source of volatility this week for the pound. However, investors will be looking beyond the details of the plan, to the overall tone of the Budget. The level of optimism that Hammond strikes could be representative of how close the UK is to breaking through the deadlock in the Brexit talks.

Is A Minority Government The Best Outcome For Germany?

The euro was weaker across the board on Monday as investors continued to deal with political developments in Germany. The Free Democrat Party (FDP) walked out of coalition talks with Angela Merkel’s Christian Democrat Union, making their initial four-way coalition agreement with the Social and the Green Party impossible.

The FDP have said that they will support a minority government, which increasingly looks like the best available option. However, a minority government has several associated risks, one of which is increased government uncertainty. A weaker Angela Merkel makes for a weaker Europe and therefore a weaker euro.

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.

There is little of interest on the eurozone economic calendar today, so investors will continue to mull over the political dilemma in Germany, which could make the euro sluggish.

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