GBP/EUR: Italian Budget Dramas & Brexit Standoff Effect Pound vs Euro

The pound ended the previous week lower versus the euro, as investors grew increasingly nervous over the lack of concrete progress in Brexit negotiations. The pound euro exchange rate started last week on a strong note hitting a high on Wednesday of €1.1463. However, the pair gave all the gains back across the second half of the week, to book a weekly loss of 0.1%. The pound euro exchange rate closed the week at €1.1370 and has fallen lower as trading starts for the new week.

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 the pound in the previous week and will continue to do this week. Speculation had been rife that the E.U. and the UK will agree the terms of a deal this week. However, a serious lack of progress over the weekend, saw UK Prime Minister label the draft treaty to take the UK out of the EU a “non-starter” and risked tearing her government apart.

As trading begins for the new week, Brexit talks are almost at a complete standstill, with no further talks scheduled before the EU leaders summit starting Wednesday of this week. There is a very real danger that Brexit talks could break down completely. As a result, there is an increasing probability that the UK is heading towards a disorderly, no deal Brexit. Leading economists and business leaders have frequently asserted that this would be the worst outcome for the UK economy and therefore 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.

Italy Budget Fears Remain

Concerns over the Italian Budget continue to grip euro traders as the new week begins. The Italian populist government is set to send its budget proposal to Brussels by 15th October. Rhetoric from the E.U. so far suggests that the proposal is likely to be met with criticism. Rome’s intentions to spend heavily increasing the budget deficit to 2.4% above the EU’s 2% limit is expected to cause a clash with Brussels. The chances of the budget being rejected by Brussels are increasing, which is making investors nervous. These fears are also increasing Italy’s borrowing costs. With higher borrowing costs investors are growing increasingly concerned of a second debt crisis. These fears are weighing on the euro.

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 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.