GBP/EUR: UK & Eurozone Politics Affects Pound & Euro

The pound dropped against the euro for a second straight week. The exchange rate dropped a further 0.7% extending losses of 0.5% from the week before. The pound euro struck a low of €1.1248, its lowest level in three and a half months.

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.

Brexit uncertainties and lack of progression in Brexit negotiations weighed heavily on the pound in the previous week. As the EU Summit came and went there was no step forward in any manger issue, only a scalding from the EU that progress is too slow, and the UK appears to be heading towards a no deal 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.

In addition to Brexit woes, market participants also digested news of a new, dovish Bank of England policy maker taking the place of hawk Ian McCaffrey. The cautious sounding new policy maker, Jonathan Haskel was joined by Jon Cunliffe who also expressed concerns over raising rates too soon. Consequently, investors are questioning the probability of the BoE raising interest rates in August, which sent the pound lower.

Brexit headlines will continue to drive the pound. In the absence of Brexit news, pound investors will focus on purchasing manager index survey results for manufacturing, construction and the service sector.

Merkel Still Under Fire

The euro rallied at the end of last week as investors digested the results of the EU Summit. A deal between the 27 leaders on how to handle the migrant crisis lifted the euro. German Chancellor Angela Merkel was under pressure to find a solution to the crisis or risk her fragile coalition government falling apart. Therefore, the deal meant that political risk subsided, boosting the common currency.

However, the interior minister of German, over the weekend rejected Merkel’s deal saying that it would worsen immigration into Germany. This means that the political risk in Germany is still high and Merkel remain under pressure to keep her coalition party together. Political risk is bad news for the euro.

Over the weekend, President Trump ramped up trade frictions by signing sanctions against EU companies in Iran. This comes following a threat of sanctions on EU cars. Responding to Trump’s threat, Brussels warned of a global retaliation and full-scale trade war. The fact that the EU is caught up in these tit for tat measures could create volatility across the week.

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