The pound rallied to its highest level in four months versus the euro on Tuesday. Rumours that the terms of a Brexit deal could be settled as soon as by Monday sent the pound soaring, while concerns over Italy’s political future spending plans weighed on the euro. The pound euro exchange rate hit a peak of €1.1450, a level last seen in June.
|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.
Media speculation that the terms of a Brexit deal were just days from being agreed sent the pound sharply higher in the previous session. Whilst the rumours remain unconfirmed they were sufficient to excite pound traders, who are particularly sensitive to any Brexit developments. A deal being agreed would mean that the UK would avoid a disorderly Brexit.
Business leaders and economist have been vocal over the damage that they foresee a disorderly Brexit doing to the UK economy. German business leaders weighed in to the debate on Tuesday, warning that a no deal Brexit would be a disaster. It would lead to “fiasco” and challenging economic conditions on both sides of the channel.
|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, is the busiest day of the week for the UK economic calendar. Investors will be watching UK GDP numbers, manufacturing and industrial production. Analysts are expecting manufacturing and industrial production to have ticked up in August. However, analysts have pencilled in a slowdown in economic growth on a monthly basis in August. Disappointing figures could drag the pound 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.|
A combination of weak data from Germany and growing fears over Italy dampened the mood towards the euro on Tuesday.
Italy’s finance minister failed to halt growing concerns over Italy’s budget plans in the previous session. Giovanni Tria told lawmakers that Italy’s coalition government intends to move ahead with spending plans, which will widen the country’s already ballooning deficit. Mr Tria’s belief that heavy spending was necessary in order to boost economic growth in Italy unnerved investors. Following his comments Italy’s borrowing costs spiraled higher and the euro came under pressure.
Rome will now enter a period of crucial dialogue with EU officials before lawmakers in Rome vote on the proposed budget plans later this week. The budget plans will then be sent to the EU next week, where Brussels is unlikely to accept proposals which breach its own rules regarding budget deficit limits.
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Inc., Currency Live or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. Consult our risk warning page for more details.
This article was initially published on TransferWise.com from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.