GBP/EUR: Pound Higher vs. Euro Ahead of UK Austerity Budget

The pound fell versus the euro for a third straight session on Friday. This resulted in a 0.9% decline in the value of the pound versus the euro. The pound is clawing some of those losses back as the new week begins.

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.

With no high impacting UK economic data released last week, the pound was dragged lower by Brexit uncertainty and domestic political woes. Brexit has divided UK Prime Minister Theresa May’s cabinet. Reports last week that she was losing control of her cabinet weighed heavily on the pound.

This week is set to be a busy week for the pound for the UK Budget on Monday and the Bank of England monetary policy meeting on Thursday.

The UK Chancellor of the Exchequer Philip Hammond will present his Autumn Budget at midday local time, which could create some volatility in the pound. Mr Hammond will announce the end of austerity for the UK, with a significant increase in spending on roads, broadband and defence. This could help lift the pound as more spending creates inflationary pressure, potential increasing the chances of an interest rate rise.

Why do raised interest rates boost a currency’s value?
Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.

However, the increase in this budget spending will come with a warning attached. Should the UK fail to secure a Brexit deal over the coming weeks then the Chancellor will hold an emergency budget, rewriting the government’s economic strategy and spending plans. This is because many economists believe that a hard Brexit will damage the UK economy and therefore will need a different approach from the government.

Euro Investors Look Ahead To Tuesday

The euro trended higher versus the pound in the previous week, despite persistent Italian budget concerns. The European Commission took the unprecedented step of rejecting the Italian draft budget given that it breaches Brussel’s rules. Rome now has 3 weeks to submit a revised version.

The European Central Bank also offered support to the euro last week. ECB President Mario Draghi soothed investor nerves, confirming that the ECB will continue with its plans to halt its bond buying programme in December, despite current market turmoil.

There is no high impacting eurozone economic data today. Investors will be looking ahead to Tuesday, which sees a slew of data released. This includes German unemployment and inflation, eurozone GDP data and confidence data.

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