GBP/EUR: Italy In Focus Ahead of Public Finance Targets

The pound rallied 1% higher versus the euro across the previous week. The pound euro exchange rate hit a peak of €1.1193 on Friday. This was its highest level in two weeks, as UK data continued to beat Eurozone figures and Brexit optimism dominated.

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.h 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 GBPIn 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.

Sentiment for the pound was strong in the previous week, as investors grew increasingly hopeful that the EU would offer Britain a post Brexit deal that was unprecedented for a non-EU country. Optimism was riding high that the UK could still get a strong Brexit deal with the EU. This would be the best-case scenario for UK businesses 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.

However, the pound could find itself struggling in the new week as the UK Prime Minister Theresa May could face a backlash from Eurosceptic ministers as they return from their summer break. The former Brexit Secretary David Davis, said over the weekend, that he would vote against the UK Prime Minister Theresa May’s Brexit proposal, which he considers to be worse than staying in the EU. This raises the prospect of a Parliamentary defeat for the Prime Minister which will unnerve pound investors.

Furthermore, German business leaders raising the alarm over the lack of progress in the Brexit talks so far could also unsettle pound traders. As the days tick by towards the October deadline and no Brexit deal has been agreed on, investors may once again doubt the ability of leaders to push something through.

Eurozone Data Weighs On Euro

Eurozone data failed to offer any support to the euro across the previous week and Friday was no different. Inflation figures for the region were weaker than what analysts had been anticipating. Inflation was 2%, lower than the 2.1% forecast, whilst core inflation was particularly sluggish at just 1%.

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.

As the new week begins concerns over the health of the Italian economy will return to the forefront of traders’ minds. The leader of the populist Italian 5 Star Movement remains defiant that the government will spend more, regardless of Italy’s already extremely high debt and regardless of a downgrading by rating agency Fitch. This could knock confidence in the Eurozone’s fourth largest economy which could dent demand for the euro further.

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