Pound Briefly Hits 3 Week High vs. Euro On False Brexit Optimism

Stronger than forecasted data and Brexit optimism sent the pound higher versus the euro, before it slipped back to end Wednesday flat. The pound euro exchange rate hit a peak of €1.1166, its highest rate in 3 weeks.

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.

Sterling received an early boost from solid service sector data. The service sector Purchasing Managers’ Index (PMI) showed that activity in the service sector expanded by more than what analysts had anticipated. The service sector PMI jumped to 54.3 in August, up from 53.5 in July and ahead of the 53.9 than analysts had pencilled in. The solid data was well received following disappointing numbers from the manufacturing and construction sectors earlier in the week.

How does strong jobs data boost the currency?
It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the goods and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.

The pound also moved sharply higher on Brexit headlines. News that Germany was willing to drop some key Brexit demands sent the pound soaring. Any signs that the UK might be able to agree a Brexit deal sends the pound higher. However, the spike higher was short lived after Germany quickly announced that the reports were simply not true. This quickly wiped away the increased optimism sending the pound back.

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.

There is no high impacting UK data due for release today. Brexit headlines will remain in focus and drive movement in the pound.

Concerns Over the Impact of Trade War Hit the Euro

The euro was broadly able to shrug off disappointing PMI data from Germany, Italy and France, with investors focusing on the marginally better than expected eurozone composite PMI in August. Overall the data painted a less than rosy picture for the health of the eurozone economy and whilst market participants were broadly able to ignore that today, this may not be the case moving forward. The PMI survey showed that business expectation for the year ahead dropped to its lowest level for close to 2 years amid growing concerns over the impact of trade wars and increased political uncertainty. Furthermore, retail sales were also disappointment, failing to reach the 1.3% growth that analysts had forecast.

Today data will remain a central focus for euro traders with German factory orders a highlight. Analysts are expecting factory orders to have rebounded in July after declining in June.

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