The pound euro exchange rate experienced a bout of volatility in the previous session after rate announcements from both The Bank of England and the European Central Bank (ECB). The pair hit a peak of €1.1244 before falling to a low of €1.1199. The pound euro exchange rate then settled close to flat on the day.
|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 surged as BoE governor Mark Carney took to the stage following the rate announcement, however the spike higher was short lived. As expected the central bank kept interest rates on hold. The BoE also highlighted increased levels of Brexit uncertainty, given the political atmosphere in Westminster, are clouding the central bank’s outlook.
However, it was Mark Carney’s chilling warning over the potential impact of a no deal Brexit on the UK economy which sent the pound tumbling. The BoE Governor believes that a no deal Brexit will lead to economic chaos, with inflation and unemployment on the rise. Even though a Brexit deal is looking more likely than it was just a few weeks ago, there is still plenty of scope for the UK to crash out of the European Union without a deal. Should this be the case, the impact, according to Mark Carney, would be disastrous.
|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 Mark Carney will speak again. Investors will listen out closely for another further comments regarding Brexit. More negativity could send the pound lower.
As analysts expected, the ECB kept interest rates on hold. As analysts expected, the central bank also revised down its growth forecasts for 2018 and 2019. However, ECB Governor, Draghi, did his best to play down this move by the central bank. He also worked to play down threats from a no deal Brexit and any spill over from Turkey’s currency crisis.
With regards to inflation, the ECB see inflationary pressures rising, even if slowly. This means that the bond buying programme is still on track to conclude at the end of this year, which market participants consider hawkish. This helped lift the euro.
|Why do raised interest rates boost a currency’s value?|
|Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.|
Today there is trade balance data for the eurozone which could create some volatility.
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