GBP/EUR: Will US Hostility To EU Pull Euro Lower vs. Pound?

The pound ended the previous week 0.1% higher versus the euro at €1.1326. The is the second straight week that the pound has gained versus the euro.

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 was the principal focus across last week. The market reacted to a UK Prime Minister Theresa May imposing a softer Brexit on her party, resulting in the resignation of two high profile ministers, including Foreign Minister Boris Johnson. Whilst the softer Brexit is considered beneficial for the UK economy, Theresa May’s growing unpopularity within her party and across the electorate is raising concerns over her ability to remain as leader. Boris Johnson is expected to launch an attack on her leadership at any moment. The political risk limited any gains on 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.

On Friday, President Trump’ comments drove the pound. Sterling fell after Trump reportedly said that there was little chance of a trade deal between the US – UK should Theresa May continue along the current soft route. However, by Friday afternoon, Trump was backtracking saying it was fake news and encouraging the UK to take the Brexit path is saw fit. This caused the pound to rally as investor optimism for a trade deal returned.

With no high impacting economic data due for release today, market participants will be watching for any Brexit developments and Theresa May’s stability as Prime Minister.

US rejects Appeal By EU On Firms In Iran

The euro failed to pick up across the week after ZEW German confidence data showed a substantial drop in economic sentiment. Businesses considered that their outlook had darkened as concerns over a trade war with the US increased. The weak data pulled the euro lower.

Why does poor economic data drag on a country’s currency?
Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.

This weekend the US stepped up its hostility towards the EU by rejecting an application for exemption from US sanction on EU firms operating in Iran. This underscores the growing rift between the US bad Europe and comes following a difficult meeting between the US President and Nato last week. As tensions increase, demand for the euro declines.

There is no influential economic data today. There are several data points across the week which could create some volatility. The first of these is inflation data on Wednesday, as measured by the consumer price index. In May, inflation hit 1.9%, just shy of the European Central Bank’s 2% target. However, core inflation, which excludes more volatile items such as food and fuel was just at 1%.

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