GBP/EUR: Pound Eases vs Euro Despite Escalating Italian Fears

The pound drifted lower versus the euro on Thursday as Brexit and Italy headlines continued to dominate. The pound sunk 0.35% versus the euro, falling away from its recent almost 4 month high.

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.

Brexit hopes, and disappointments drove movements in the pound in the previous session. UK Prime Minister Theresa May gathered her inner circle on Thursday to tell them that a historic Brexit deal was on the brink of being agreed. The backstop deal for the Irish border is issue has infuriated both Eurosceptics and the Irish DUP.

Theresa May faced a backlash from Eurosceptics who believe that the deal will see the UK tied to the EU customs union forever. Meanwhile the DUP, who Theresa May relies on to prop up her government have threatened to topple the government should Theresa May go ahead regardless. Whilst optimism is growing that a deal will be achieved, there is also a growing sense that these last few steps to secure a deal could be some of the hardest.

The pound struggled as concerns over whether Theresa May would actually get a deal through unnerved investors.

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.

Weaker Dollar Lifts Euro

The euro was broadly in favour in the previous session despite concerns over Italy’s planned spending. Italy’s Parliament approved government budgets targets on Thursday, despite warnings from the EU and the IMF over the budget deficit.

The populist coalitions intended spending will put the budget deficit at 2.4%. This is sharply higher than the EU’S 2% limit. The defiance by Rome to continue with heavy spending plans is seen as a risk to eurozone stability. As a result, Italy’s borrowing costs have spiralled reawakening concerns over the level of debt in Italy.

The European central bank will not come to Italy’s rescue if the government or banking sector run out of cash. This is because Italy has formally rejected the idea of belt tightening in exchange for a bailout.

Despite the negativity surround Italy, the euro still moved higher. This was mainly thanks to the weaker dollar. The euro often trades inversely to the dollar. The dollar dropped sharply on Thursday after weak inflation data. The dollar’s weakness lifted the euro.

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