GBP/EUR: Brexit Optimism Boosts Pound Vs The Euro

Brexit developments were responsible for the pound climbing higher versus the euro on Thursday. The pound euro exchange rate edged northwards, hitting a peak of €1.1310. This is the strongest that he pound has traded at versus the euro in almost 3 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.

Reports that Ireland is backing UK Prime Ministers Theresa May’s new backstop proposal for the Brexit Irish border issue, boosted the pound in the previous session. Theresa May is proposing that the UK remains part of the EU customs union until a trade deal is reached, should no other solution to the Irish border issue be found. Her plan would prevent a hard border in Ireland and prevent Northern Ireland being carved off from the UK, which would be the case if just Northern Ireland remained part of the customs union.

The support from Ireland comes just ahead of an important EU Summit prior to which Theresa May wants the Irish border issue resolved. Doubts remain over whether Brussels will agree to the plan, which so far they have refused. Brussels; concerns are that this option would give the UK access to the EU trade and regulatory regime without any of the obligations of membership. Still, Irish support is another step in the right direction towards an orderly, softer, Brexit. This boosted the pound.

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 the UK economic calendar remains quiet. Brexit developments will continue to drive the pound.

German Data Under the Spotlight

The euro was weaker versus the pound in the previous session. Weak German construction data triggered a dip in the euro. Data showed that German construction sector activity unexpectedly slowed to 50.2 in September, from 50.5 the previous month and significantly below the 52.9 reading that analysts had been forecasting. A reading below 50 indicates contraction for the sector. The weak figure sent the euro lower.

Why does poor economic data drag on a country’s currency?
Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.

Germany will remain in focus today with the release of German factory orders. Analysts are predicting that orders will have rebounded in August after falling sharply in July. Should the rebound fail to materialise, investors will grow increasingly nervous over the impact of trade tensions on the German economy. This could send the euro lower.

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