GBP/EUR: Pound Tumbles vs Euro As Brexit Deal Optimism Sinks

Sterling dived over 1.1% versus the euro on Friday following a disastrous informal EU meeting in Salzburg, Austria. The pound dived to a low of €1.1118, its weakest level versus the common currency in two weeks. This meant that the pound lost 0.9% versus the euro across the course of the past week, it’s weakest weekly performance in 2 months.

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 fell sharply lower after UK Prime Minister Theresa May said that Brexit talks had hit an impasse on Friday. Her comments came after the informal EU27 meeting in Salzburg, where EU leaders as good as tore up her Chequers plan, calling it unworkable and in need of serious revisions. With both sides refusing to budge on their red lines any form of deal is looking increasingly unlikely, especially given the short time frame now involved until the November deadline. The mid November EU summit is the last chance for a deal to be signed off between the two side.

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.

Politics will remain in focus for the pound this week as investors will be looking to see whether Theresa May can hold her ground as Prime Minister. The four-day Conservative Party annual Conference Party begins Sunday 30th September and there could be a fresh leadership challenge. Theresa May desperately needs to convince her party to back her this week. Failure to do so could see the pound sink on political risk

How does political risk have impact on a currency?
Political risk drags on the confidence of consumers and businesses alike, which means both corporations and regular households are then less inclined to spend money. The drop in spending, in turn, slows the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. Signs that a country is politically or economically less stable will result in foreign investors pulling their money out of the country. This means selling out of the local currency, which then increases its supply and, in turn, devalues the money.

German Business Sentiment In Focus

Whilst the euro traded higher versus the pound at the end of last week, it traded flat versus other peers. This came following a mixed bag of data released on Friday. The manufacturing and composite pmi readings for Germany and the eurozone was weaker than what analysts had been expecting in September. However, service sector activity managed expand by more than what analysts had been forecasting, evening out the impact.

Today investors will look towards the German IFO business climate indicator. Business morale jumped sharply in August as sentiment improved amid a trade truce between the EU and Trump. As trade tensions have continued to ease, business sentient could increase again this month. This would boost the euro.

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