Tuesday’s session was certainly an eventful one for the pound. Sterling drifted lower through the day, until popping sharply higher on news of a Brexit Bill agreement. The pound hit a low of €1.1134, before jumping to a high of €1.1273. This marks the strongest level that the pound has traded at against the euro in a week.
|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.
The pound started the previous session in a sluggish manner. Investors were concerned as the Bank of England (BoE) released its Financial Stability Report. On the positive side, the BoE revealed that all 7 big UK banks passed the stress test for the first time since the test was brought in, during the financial crisis. This means that the financial system should be able to handle the adverse effects of a disorderly Brexit. However, the central bank continued to warn over the adverse effects of Brexit, saying the government would need to do more to reduce the risks that the UK economy is facing. Pound traders were concerned over the Bank’s pessimism and as a result, the pound moved lower.
Sterling then rebounded sharply higher on news that the UK had agreed to meet the EU’s demands over the Brexit divorce bill. This is an amount that the EU wants UK to pay for the losses that a Brexit might cause to the bloc. This means that the UK would assume liabilities worth up to €100 billion. Although, in reality the UK is considering paying around half of this amount. This is a huge step forwards in Brexit negotiations and removes one of the biggest hurdles to a Brexit divorce settlement. Suddenly, the possibility of progressing towards trade and transition deal talks appears much more likely. This means a smooth Brexit could be a reality, which would be more beneficial for the pound.
|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.|
The euro had a less favourable session on Tuesday. The common currency was weaker across the board despite a solid German consumer confidence reading. Data released shows that the German consumer confidence index is holding steady at 10.7 in December. This comes after falling for the past two consecutive months and therefore could mean that economic activity may pick up moving into Christmas. However, it remains to be seen whether the failed coalition talks impacted heavily on consumer confidence. This could become clearer over the next few weeks.
|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.|
Despite strong data, the euro slipped lower. The euro tends to trade inversely to the US dollar and as the mood for the dollar shot higher, the euro pulled lower.
Today, the focus remains with Germany and the release of German inflation figures. Last month German inflation failed to move higher which unnerved investors. Today investors will be watching for a monthly increase of 0.3%. Should the figure come in lower, the euro could weaken.
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.