The pound traded steadily lower versus the euro on Monday, as politics drove trading for both the pound and the euro. The pound euro exchange rate dropped 0.47% across the day to a low of €1.1392, its lowest level in three sessions.
|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 grinded lower through the previous session as pressure mounted on UK Prime Minister Theresa May. Brexit was once again the focus for traders, as the Brexit Bill returned to the House of Lords. With the UK due to leave the EU in less than a year there is still an ongoing row over what will happen if the UK has no Brexit deal, or if Parliament votes to reject the final deal.
Whilst Theresa May narrowly avoided embarrassment last week, pushing through the Brexit Bill but with concessions to give MP’s increased power over a no deal scenario. The Lords have taken this a step further deciding that MP’s should have to approve the government’s next steps if there were no final deal. This is being labelled the meaningful vote amendment. The Bill will now be sent back to the House of Commons for a vote on Wednesday.
Another defeat for the government is making Theresa May look weak, increasing the possibility of her being ousted. The political risk is weighing on the value of 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.|
Once again today there is no high impact UK economic data for release. Therefore, investor attention is likely to stick with Brexit until the vote on Wednesday after which the Bank of England will once again take centre stage.
The euro was back in demand in the previous session after German Chancellor Angela Merkel managed to win some breathing space to ease the German political crisis. Merkel has been given a further 2 weeks to find a European solution to the current immigration crisis, which threatens to pull her 3-month coalition apart. Fears over the German government collapsing had weighed on the euro; however, investors have viewed these two additional weeks as a positive move, which lifted the euro.
Political developments and European Central Bank speakers, including ECB President Draghi could drive trading in the euro today.
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.