The pound stumbled versus the euro again on Friday closing down 0.1% at €1.1349. This was sufficient for the pound euro exchange rate to end the week in the red for the second consecutive week. The pound an the euro are both under pressure on Monday, keeping the pair evenly matched.
|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 = 1.28934 USD
Here, £1 is equivalent to approximately $1.29. This specifically measures the pound’s worth against the dollar. If the US dollar amount increases in this pairing, it’s positive for the pound.
Or, if you were looking at it the other way around: 1 USD = 0.77786 GBP
In this example, $1 is equivalent to approximately £0.78. This measures the US dollar’s worth versus the British pound. If the sterling number gets larger, it’s good news for the dollar.
The pound drifted lower across the previous week, as Brexit remains a key issue. Last week saw another failed EU Leaders Summit with the Irish border issue still a sticking point. Whilst there were no new developments from either side, both sides touched on extending the transition period as a way of giving more time to find a solution to the Irish border issue.
UK Prime Minister Theresa May saying that she was willing to consider extending the transition period infuriated the Eurosceptics in the UK Conservative party. There has already been talk of Theresa May facing a leadership challenge and or a vote of no confidence in the coming weeks or months. Analysts expect this political and Brexit uncertainty to weigh on the demand for the pound in the near term.
|How does political risk have impact on a currency?|
|Political risk drags on the confidence of consumers and businesses alike, which means both corporations and regular households are then less inclined to spend money. The drop in spending, in turn, slows the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. Signs that a country is politically or economically less stable will result in foreign investors pulling their money out of the country. This means selling out of the local currency, which then increases its supply and, in turn, devalues the money.|
The UK economic calendar is quiet across the coming week meaning that pound investors will concentrate almost solely on Brexit and domestic political developments. Towards the end of the week investors will begin to look ahead to the Budget 29th October and Bank of England Meeting 1st November.
The Euro struggled to gain ground in the previous week as concerns of Italy’s spending plans continued to dampen sentiment towards the single currency. The Italian populist government submitted its draft budget and the European Commission has warned that it breaches EU rules. With few concrete developments in the clash between Brussels and Rome, analysts are expecting Italy to remain a focal for euro investors this week.
However, one big difference between last week and this week is the Eurozone economic calendar. Whilst the calendar was quiet last week, it will pick up for the week ahead. The European Central Bank (ECB) will give it’s interest rate decision this week which will also attract attention, even though analysts widely believe that the central bank will keep rates on hold. The PMI reports mid-week could also create some volatility.
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.