GBP/EUR: Pound Steady vs. Euro As Angela Merkel Steps Down

The pound briefly moved higher versus the euro on Monday, before falling sharply lower later in the session. The pound euro exchange rate fell to a low of €1.1235. This is the lowest level that the pound has traded at versus the euro since early October.

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.

The pound initially rallied before dropping in the previous session as UK Chancellor of the Exchequer Philip Hammond presented his Autumn Budget. This was labelled as the Budget that was the beginning of the end of austerity and Mr Hammond was generous in his giveaways. However, the extra spending and tax cuts were conditional on a Brexit deal being achieved. Given the current deadlock in Brexit talks, there are doubts as to whether these giveaways will ever materialise. The pound’s lacklustre reaction showed that investors were not convinced.

The Office of Budget Responsibility (OBR) revised its growth forecasts for the UK up from 1.3% to 1.6% in 2019. Economic growth was revised higher in 2020 and 2021 to 1.4%. Whilst an upward revision is encouraging, by historical measures these figures are still low. Furthermore, the OBR forecasts under the assumption of a Brexit deal being achieved. Given that Brexit talks are still in deadlock, the growth forecasts are rather redundant.

With no high impacting economic data investors will continue digesting Philip Hammonds Budget, whilst also having concern over the lack of developments in Brexit talks.

German Politics Look To A New Era

The euro will be closely watched by investors today as German Chancellor Merkel, steps down as leader of Germany’s ruling Christian Democratic Union (CDU) Party following 18 years of rule.

Mrs Merkel’s authority has been gradually grinded down in her fourth term in office after the CDU won its lowest vote shares since 1949. This move will now set in motion a bitter succession battle for control of one of Europe’s most powerful political parties. Merkle’s exit will also leave a vacuum in Europe where over the course of 13 years she has steadily increased her influence to become Europe’s most powerful politician.

So far the euro’s reaction has been minimal, however political instability could weigh on the single currency going forward.

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.

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