The pound fell versus the euro for most of the session on Monday, before picking up late in the day to close almost flat at €1.1205.
|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 pound kicked off the new week on the back foot as a quiet economic calendar left investors dwelling on Brexit headlines and questioning whether the Bank of England (BoE) will raise rates in August.
New foreign minister Jeremy Hunt gave a stark warning to the EU that the UK is heading towards an accidental no deal Brexit. With the EU rejecting many off UK Prime Minister Theresa May’s proposals a no deal Brexit is looking very likely. This would be the worst-case scenario for industry, the UK economy and therefore the pound.
|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.|
Monday afternoon saw BoE policy maker Ben Broadbent speak, the last BoE official to give a speech before the monetary policy meeting in two weeks’ time. Ben Broadbent said he was still unsure whether he will vote for a rate rise or not, a comment which sent the pound to its low for the day. However, the market recovered quickly, and analysts are expecting the BoE to raise rates despite recent weaker data. With market participants optimistic of a rate rise, the pound could fall heavily if it the rate rise doesn’t materialise.
Today the UK economic calendar is quiet once again, so Brexit headlines will drive price movement.
The euro traded higher versus the pound in early trade on Monday, after Eurozone consumer confidence marginally beat analysts’ expectations. Consumer confidence in the region declined by 0.6, in July, the same as in June. This was above the 0.7 decrease that analysts had forecast. Confidence moving in the right direction ties in with analysts forecast that the eurozone economy could strengthen in the second half of this year. The stronger reading boosted the euro.
|Why does strong economic data boost a country’s currency?|
|Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.|
Today euro investors will continue to focus on the economic calendar, with a barrage of purchasing managers index (pmi) data due for release. Stronger readings from the pmi data covering services, manufacturing and construction could help lift the euro ahead of the European Central Bank policy decision on Thursday.
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