Optimism over a solution to the Irish border issue pushed the pound marginally higher versus the euro on Wednesday. The pound hit a high of €1.1450, before easing back to $1.1425, an increase of 0.1% on the day.
|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.
A report in the Times Newspaper (UK) indicating that Britain will offer a solution over the Irish border issue, imminently, boosted the pound in early trade. The Irish border has been a large problem in Brexit negotiations and must be resolved for the transition deal agreed last week to go ahead. Given that the transitional deal will pave the way for a smooth separation from the EU for UK business it is extremely beneficial for the UK economy and the pound. Therefore, any sign of a breakthrough in the Irish border problem is favourable for the pound., by preventing a hard Brexit
|Why is a “soft” Brexit better for sterling than a “hard” Brexit?|
|A soft Brexit implies anything less than UK’s complete withdrawal from the EU. For example, it could mean the UK retains some form of membership to the European Union single market in exchange for some free movement of people, i.e. immigration. This is considered more positive than a “hard” Brexit, which is a full severance from the EU. The reason “soft” is considered more pound-friendly is because the economic impact would be lower. If there is less negative impact on the economy, foreign investors will continue to invest in the UK. As investment requires local currency, this increased demand for the pound then boosts its value.|
However, the pound ten gave up its gains after data from the Confederation of British Industry (CBI) revealed that retails sales fell sharply in March for the first time in 5 months. Difficult financial conditions stemming from rising prices and low wage growth, plus harsh weather conditions and transport woes, meant shoppers stayed away from the high street. The disappointing data pulled the pound from its high.
Today investors will focus on UK GDP data. Analysts are expecting the UK economy to have grown by 0.4% quarter on quarter or 1.4% on an annualised basis. This would mean the UK is one of the slowest growing major economies. Should growth be lower than the figure forecast, the pound could decline sharply.
|Why does poor economic data drag on a country’s currency?|
|Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.|
Demand for the euro was weak in the previous session despite German consumer confidence beating analysts expectations. Consumer confidence in Germany edged higher to 10.9, above the 10.8 reading from the previous month. However, the euro wasn’t able to capitalise on the stronger reading due to disappointing data earlier in the week.
Today investors will look towards the German unemployment figure for further insight into the health of the German economy. There have been growing concerns that growth in the eurozone is losing momentum. Investors will look to Germany, the powerhouse of Europe for signs that the economy is holding up. Weaker than forecast unemployment numbers could weigh on the euro.
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.