Tuesday was a day of two halves for the pound. Sterling dropped lower versus the euro in early trade after disappointing UK economic data. The pound then surged higher to a peak of €1.1402 as UK Prime Minister Theresa May won a key Brexit vote in Parliament later in 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.
Data from the UK continued to raise concerns over the health of the UK economy in the previous session. Whilst the unemployment level remained constant at 4.2%, the UK labour report showed that average earnings unexpectedly dipped lower in the three months to April. Analysts had been expecting wages growth to remain constant at 2.9%. Instead it dropped to 2.8%. Whilst this is still higher than inflation, which was 2.4%, the weaker figure gives the Bank of England (BoE) another reason to not hike interest rates.
Theresa May and the UK government avoided a major defeat on its Brexit Bill on Tuesday. The votes after a late concession were 324 versus 298. The pound rallied for two reasons. Firstly, UK Prime Minister will remain in power. A defeat in this vote would have seen Theresa May labelled as unfit to lead the UK through Brexit and would have almost certainly resulted in a challenge on her authority.
Secondly, in order to win the vote May had to compromise to hand more control over Britain’s exit from the European Union to MP’s. MP’s will now have increased power if May fails to secure a Brexit deal. This increases the chances of a softer version of a Brexit divorce. Any signs of a softer Brexit is favoured by the pound.
|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.|
Today investors will look towards inflation which analysts forecast will remain constant in May. Should inflation also dip lower the pound could fall.
The euro traded broadly lower on Tuesday as investors digested lacklustre statistics from the bloc. Economic sentiment was sharply lower across the eurozone in June as recent trade war fears has dented economic confidence in the region. Economic sentiment in Germany, the powerhouse of Europe was at its lowest level since 2012, this comes after a slew of weaker export and production figure.
Industrial production data for the eurozone could create some volatility, although investors will be mainly looking towards the European Central Bank policy decision on Thursday.
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.