GBP/EUR: Theresa May Clings Onto Power Lifting Pound vs. Euro

The pound fell versus the euro on Monday, sent lower amid Brexit chaos in the UK government. The euro, on the other hand, received a boost from European Central Bank President Mario Draghi, sending the pound euro exchange rate to a low of €1.1243 before it recovered some lost ground into the close.

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.

UK Prime Minister Theresa May was struggling to control the fallout from Friday’s cabinet meeting, where she changed the UK’s Brexit stance to one which was more aligned to the EU. The pound initially reacted well, as a softer Brexit is more beneficial to UK businesses and therefore the UK economy.

The pound remained resilient when UK Brexit Secretary David Davis resigned from Theresa May’s government in the early hours of Monday. However, the pound plunged when Foreign Secretary Boris Johnson handed in his resignation. This is because Boris Johnson could be considered an alternative leader to the Conservative party, should Theresa May face a vote of no confidence. The increased political risk sent the pound plummeting.

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.

Theresa May is defiantly clinging on to power. The next few days will be crucial for Theresa May if she is going to see off political rivals. However, what is clear is that she won’t be stepping down of her own accord.

Today the economic calendar fills up slightly giving investors a slight distraction from Brexit developments. In the absence of fresh headlines from Downing Street, industrial and manufacturing production could create some volatility.

Will German ZEW Confidence Pull Euro Lower?

The ECB President Mario Draghi boosted the euro after speaking confidently about the health of the eurozone economy. Draghi assured lawmakers at the European Parliament that stimulus measures employed by ECB had been very effective in boosting growth and inflation in the eurozone. Draghi continued that he believed that growth and inflation remain on target to hit 1.9% each by 2020. This news boosted investor optimism that a rate rise could be on the way sooner rather than later.

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.

Today market participants will look towards ZEW German sentiment data. Economic sentiment slumped in June to its lowest level since 2012 as fears over trade conditions and stability in Italy weighed on businesses. Analysts expect German economic sentiment to fall again in July as trade war fears increased. This could pull the euro lower.

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