GBP/EUR: Brexit Fears Overshadow Rising UK Housing Prices

The pound tumbled versus the euro for a second straight session on Tuesday. Sterling plummeted in early trade to €1.1151, its lowest level in 5 months. The pound failed to claw back the lost ground across the session.

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.

With a relatively quiet UK economic calendar investors continued to focus on the possibility of a no deal Brexit. Not even stronger than forecast housing data was sufficient to boost the mood towards sterling.

Halifax house price report showed that house price jumped in June, significantly more than analysts had been anticipating. On a monthly basis house prices increased 1.4%, well above the 0.2% increase analysts pencilled in. On a yearly basis house prices soared 3.3%, in July, above the 2.7% analysts had forecast. Higher house prices is usually a sign of a stronger economy and more confident consumer. Usually a stronger house price index would lift the pound, however the fact that the pound still plummeted versus the euro proves that Brexit fears are driving the price of the pound.

As investors start to realise that time for a deal is running out and that a hard, no deal Brexit is looking increasingly likely the pound continues to sink.

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.

Today, is another quiet day on the UK economic calendar. This means that Brexit fears could drive trading for another session.

Euro Stronger On Larger German Trade Surplus

The euro moved higher versus the pound in the previous session, as investors cheered data showing that the German trade surplus that was larger than what analysts had been expecting. The trade balance for Germany was €21.8 billion, bigger than the €20.9 billion that analyst had been predicting. Exports did not decline as much as economist had been expecting given the trade tensions with the US. The stronger data lifted 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.

With no high impacting eurozone data today, volatility could be weak for the euro. Instead euro traders will look ahead to Thursday when the European Central Bank will release its economic bulletin. This report will be watched closely by analysts after conflicting economic data from the region recently; PMI’s show strong activity whilst the GDP show a weakening of activity.

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