Pound Strengthens vs. Euro As Brexit Divorce Bill Boosts Hopes of Trade Talks

The pound surged to a two week high versus the euro on Wednesday. Sterling has jumped over 200 points versus the euro since Tuesday, hitting a high of €1.1340 for the pound. The last time that the pound traded at this level versus the euro was November 10.

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.

Sentiment towards the pound continued to soar across the day yesterday. The second consecutive day of gains, thanks to news of a breakthrough in Brexit negotiations. Investors continued digesting reports that the UK will pay the EU the full asking price for the Brexit divorce bill. This has been one of the biggest sticking points in Brexit negotiations. Progress means investors are growing in confidence that trade and transition deal talks will begin next month, making a smooth Brexit increasingly 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.

High impacting economic data continues to be in short supply today, meaning that Brexit headlines are likely to continue driving sterling. Investors will be looking at the remain obstacles that the UK need to address in order to secure progress to second phase talks next week. Whilst domestic political issues arising from hardline Brexit Tories could also come into focus.

Politics aside, UK consumer confidence data will be released, however its impact could be limited. Analysts are expecting the report to show that the UK consumer turned even more gloomy in November, as they remain downbeat over the health of the economy. However, given that spirits are lifting following Brexit developments, the consumer confidence report could now be considered old news.

Eurozone Inflation Figures to Impress on Germany’s Lead

The euro was mildly stronger against its major peers, just less so than the pound. The euro was supported by an uptick in inflation in Germany. Prices in Germany increased by more 1.8% year on year, above the 1.7% forecast by analysts and above last month’s 1.6%. On a quarterly basis prices increased 0.3%, significantly higher than last month’s stagnant 0%. Germany is considered the powerhouse of Europe and its inflation figures often serve as a good precursor for eurozone inflation figures.

Today sees a slew of German and eurozone data released. Eurozone inflation, as measured by the consumer price index could cause some volatility for the common currency. Inflation in the bloc has remained low through most of the year, despite data pointing to a strong, robust economy. Policy makers are keen to see inflation move higher before interest rates are lifted. Should the CPI figure beat analysts’ forecasts, the euro could rally as investors increase the odds of a rate rise.

Why do raised interest rates boost 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. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.

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