The pound moved higher versus the euro at the start of the new week. The pound euro exchange rate inched 0.2% higher across the previous session, as European Central Bank (ECB) and Brexit optimism dominated. The pound euro exchange rate ended Monday’s session at €1.1160.
|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 was moving higher across the board on Monday, as Brexit optimism returned. At the end of last week, investors were concerned that the UK would crash out of the EU without a deal after Theresa May’s chequers plan was torn to shreds by EU leaders. However, this week UK Brexit Secretary Dominic Raab said he was confident that the UK would secure a good deal, which was sufficient for market participants to believe that the UK may escape a disorderly exit.
The pound is extremely sensitive to any Brexit news. Business leaders and economists say that a hard no deal Brexit will hit the UK economy hard. Therefore, any headlines pointing towards a disorderly no deal, hard Brexit sends the pound lower, whilst suggestions of an orderly, softer Brexit boosts sterling. This will continue as the November deadline moves closer.
|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 there is no high impacting economic data to drive the pound movement. Therefore, Brexit headlines are likely to have an even larger impact.
The euro was also trading higher versus its peers on Monday following a more hawkish than usual ECB Governor, Mario Draghi. Draghi, is usually carefully conservative with his words regarding the state of inflation in the eurozone. However, on Monday when he spoke at the ECON committee of the European Parliament, the ECB governor sounded noticeably more confident that price pressure are on the increase in the region.
Draghi, also expressed confidence that wage growth would continue and confirmed that the outlook was for continued broad based growth across the eurozone. The strong, confident outlook boosted investor hopes of an interest rate rise from the ECB.
|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 inflation will remain in focus, wit the release of German wholesale price index. Furthermore, there will be speeches from several ECB policy makers which will grab the attention of investors.
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