GBP/EUR: Will Italian Budget Concerns See Pound Rise vs Euro?

The pound drove higher versus the euro on Friday, hitting a high of €1.1253. This meant that the pound gained 0.45% against the euro across the course of the week, its third straight week of gains versus the common currency.

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 moved higher across the previous week thanks to the most recent jobs data, wages numbers and GDP data all printing better than what analysts were expecting. Furthermore, the pound benefited from a lack of negative Brexit news.

Brexit talks continued last week and a more amenable attitude was evident from the EU, with both Brussels and the UK now apparently willing to make concessions. This sent out a more positive signal to investors that a deal could be achieved. However, with the deadline fast approaching there are still several important issues that need resolutions in order for a Brexit deal to be achieved.

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.

With no high impacting UK economic data due for release today, Brexit talks will remain in focus at the beginning of the new week. Investors will be looking particularly towards the Irish border issue, one of the important issues for which there is still no agreed resolution and one which EU Chief Negotiator Michel Barnier has recently softened his stance over, saying that it should be de dramatized.

Over the weekend reports surfaced that Brussels are discussing with Dublin options to the Irish border row and ways that they could make it work, in yet another clear sign that they too want a deal to be achieved.

Italy To Weigh On Euro?

Last week the European Central Bank confirmed that it is still looking to wind up its bond buying programme in December and start raising interest rates around the summer of 2019. The central bank cited diminishing uncertainty surrounding its inflation outlook as reasons for its plan of action.

However, any of the positivity from the ECB that was injected into the euro, was quickly wiped out on Friday as concerns over Italy rose to the surface once again. Amid increasingly harsh anti -EU rhetoric investor attention is now firmly on the upcoming Italian budget. Investors want to see whether it complies with the EU spending limitation or whether a showdown will be on the cards.

Today the euro could experience some volatility on the release of eurozone inflation data.

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