GBP/EUR: Brexit Fears Keeping Pound Lower vs. Euro

The pound fell sharply versus euro on Monday as UK ministers talked up the possibility of a no deal Brexit. The pound euro exchange rate dived to a low of €1.1191, before ending the session at €1.1194.

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.

Fears of a no deal Brexit sent the pound tumbling as the new week kicked off. International trade secretary Liam Fox waded into Brexit discussion, amplifying fears that the UK will crash out of the European Union without a deal. Liam Fox said that he believed that the probability of a no deal Brexit was now sitting at around 60 — 40. His comments come just day after Bank of England Governor Mark Carney said that the chances of the UK leaving the EU without a deal were uncomfortably high.

Many trade groups and economists have warned over the potential consequences of a no deal Brexit, which would be extremely damaging for 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.

Brexit fears have dominated pound trading for a while, even overshadowing a rate rise by the Bank of England last week. The central bank hiked rates by 0.25% to 0.75% the highest level in a decade, yet the pound has been falling since then as Brexit takes centre stage.

Today Brexit headlines will continue to drive trading in the pound, particularly because the UK economic calendar is light on high impacting data.

Eurozone Industrial Production In Focus

The euro was broadly flat on Monday, although stronger versus the pound. The sluggish demand for the common currency came following lacklustre German factory order data. Year on year, German factory data was forecast by analysts to be 3.4% in July. The actual figure was a contraction of -0.8%.

Economists suggest that the decline could be a sign that President Trump’s trade tariffs on China and the EU are damaging the global economy, denting confidence and weighing on demand for German goods.

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.

Today investors will continue to look at data coming out of Germany, this time German industrial production will be in focus. A similar decline in industrial production could see the euro decline.

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