GBP/EUR: German Political Crisis Talks Lift Pound vs. Euro

A very cautious tone from the European Central Bank (ECB) in the previous week weighed heavily on the euro. As a result, the pound euro exchange finished last week at €1.1445, 0.4% higher than it started, even though most UK data mostly underwhelmed.

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.

Later this week the Bank of England (BoE) will take centre stage but first Brexit is in focus. Last week the UK Prime Minister Theresa May successfully managed to push the Brexit Bill through Parliament, albeit by making some important concessions. UK Conservative Remainers had threatened to vote against the Brexit Bill last week, however May successfully won the rebels over by offering concessions to MP’s over a vote should no Brexit deal be in place. That said, there is still a lack of clarity what this so called “meaningful vote” by MP’s will look like and how much influence it will actually have.

The current row revolves around how much say MP’s should have. The amendment which was drawn up last week to avoid the rebellion in Parliament was changed at the last minute and rebels now saw it as Valueless. The Bill has been returned to the House of Lords this week and is due to come to the House of Commons this week, with further rebellions now expected.

Signs that Theresa May is losing control and hold of her party could see rivals start lining up to replace her. Such a level of political risk is bad news for the pound.

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.

German Coalition Division To Unnerve Euro Traders?

The surprisingly cautious tone from ECB President Draghi last week sent demand for the euro tumbling. Draghi announced the winding down of the bond buying programme from September until December, as analysts had expected. However, Draghi pushed the prospect of an interest rate rise for the eurozone back to the second half of next year, which pulled the common currency lower.

With no high impacting data from the eurozone to capture investors’ attention, political developments in Germany could take centre stage. Migration concerns are in danger of splitting the German coalition down the middle as the parties in the German coalition struggle to agree on how to handle an increasingly urgent situation. Sign of political instability in Europe’s largest economy could unnerve euro traders at the start of the new week.

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