GBP/EUR: Pound Recovers vs Euro As Brexit Enters Decisive Phase

Politics were once again driving price movement for both the euro and the pound on Monday. Italy’s hard to approve budget plans remained under the spotlight for another session, as did Brexit concerns. With negative headlines hitting both the pound and the euro, the exchange rate remained evenly matched throughout the session. The pair finished the session 0.1% higher than it started at, €1.1391.

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.

Over the previous week Brexit optimism had driven the pound higher. However, pound traders have since grown concerned that UK Prime Minister Theresa May is dragging her feet. After positive, commentary from Brussels over the weekend, Theresa May’s office was quick to criticise the EU for being overly optimistic that a Brexit deal will be achieved.

Theresa May’s spokesman insisted that there was still a significant distance between the two sides and that the EU still needed to make further compromises in order for a deal to be done. The spokesman also affirmed that the wording and framework of any deal must be precise. The Prime Minister’s office made is clear that the UK is looking to avoid any form of blind Brexit.

Renewed Brexit optimism lifted the pound later in the day. Theresa May saying that she was ready to make concessions over the Irish border if the EU would give the UK frictionless trade in return helped lift sterling. Whilst the EU have not shown signs that they are willing to make such a deal, pound traders cheered the continued attempts by the UK government to achieve a deal.

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.

Italian Woes Keep The Euro Under Pressure

Investors remained focused on increasing political tension between the Italian populist coalition government and the European Commission. The Italian government looked set to clash with the European Commission when it revealed its spending plans, which were in excess of the EU limit. The political climate had been improving towards the end of last week as analysts expected Italy to rein in its spending in 2020 and 2021.

However, comments by the Deputy PM Matteo Salvini as he lashed out calling EU officials the “enemies of Europe” increased the chances of a clash between the two sides, raising political risk. This unnerved euro investors, squashing demand for the euro. Analysts are expecting uncertainty to continue until the Italian budget is submitted in mid-October.

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