A Brexit Bill win in Parliament for UK Prime Minister Theresa May boosted the pound on Wednesday, lifting the pound euro exchange rate to a peak of €1.1404.
|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.|
Theresa May fended off a rebellion from within her own party, winning a vote in Parliament over key Brexit legislation. UK lawmakers voted 319 — 303 to reject an amendment giving them more powers in the case of a no deal Brexit. Parliament voted against giving more power to MP’s which would essentially prevent a no deal Brexit, the worst nightmare for many businesses. The win by May means that her Brexit strategy in back on track and her authority has been boosted. Reduced political risk led the pound to rally.
|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.|
Today there are two big events taking place that pound traders will watch keenly. First the Bank of England (BoE) rate decision. Analysts are not expecting BoE to raise interest rates. There will not be a press conference following the rate announcement either. Investors will scrutinise the minutes from the meeting to assess the probability of a rate rise in August happening.
The BoE said in May that it believed that the softer economic growth in the first quarter of the year was temporary. It was waiting for further economic data to confirm this. The data since the May meeting has been mixed. However, analysts expect the BoE to keep their options open.
|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.|
Following the BoE rate announcement investor attention will shift to Chancellor Philip Hammond and BoE Governor Mark Carney at the Mansion House Speech, assessing the health of the UK economy and its outlook.
After European Central Bank President Mario Draghi gave a particularly cautious speech at Sintra on Tuesday, he was more optimistic on Wednesday. Draghi commented that he believed that wage growth was on an upward path. This boosted the euro because higher wages usually mean higher inflation down the road. In turn higher inflation means more interest rate rises. This lifted the euro it from the doldrums of the previous session.
Today consumer confidence is the only eurozone release, which could attract some attention, as could the prospect of a eurozone wide budget.
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.