Not even a few optimistic words from Bank of England (BoE) Governor Mark Carney were sufficient to boost the pound. Brexit woes and encouraging trade war news for the eurozone sent the pound euro exchange rate to a low of €1.1289.
|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 BoE Governor Mark Carney spoke some encouraging words when he appeared in Newcastle yesterday. Mr Carney once again said that the central bank believes that the UK economy will pick up in the second quarter after a slow start to the year. His comments come following a hattrick of pmi results that beat analysts’ expectations, also indicating a pickup in economic growth in the second quarter. Market participants are interpreting his comments as hawkish, meaning that investor expectations for a rate rise in August are increasing. Under normal circumstance this would boost the pound.
However, Brexit fears were driving the pound’s movement on Wednesday. As the clock ticks towards the deadline for a Brexit deal, UK Prime Minister Theresa May still appears to be without a viable plan. Theresa May met with German Chancellor Angela Merkel on Thursday, who told her that her most recent Brexit plan was unworkable. With still no workable plan on the table a hard no deal Brexit looks likely.
|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.
Brexit will remain in focus as the prime minister and her waring Brexit cabinet set off to the Chequers to try to find a way to make Brexit work.
Whilst Angela Merkel sent the pound lower, she also boosted the euro. Merkel said that she was willing to cut EU tariffs on cars in an attempt to sooth the US. This is a significant move by the German Chancellor and unofficial leader of the EU. Whilst there has been no response yet from the White House, euro investors saw this as a step in the right direction to avoiding a trade war with the US, which would be hugely damaging to the EU economy.
In the absence of any further trade war news German industrial production figures could create some volatility in the euro.
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