GBP/EUR: Brexit & Italian Budget Concerns To Drive Trading

Despite a lack of solid Brexit developments across the previous week, the pound still managed to gain 0.4% versus the euro. After opening the previous week at €1.1393 and hitting a six month high of €1.1511, the pair closed at €1.1448.

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.h 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 GBPIn 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 advanced last week thanks to speculation that there could be a Brexit deal between the UK and Brussels in coming weeks. Brexit will continue to dictate movement in the pound’s performance this week as the November 21st deadline that Brexit Secretary Dominic Raab touted draws closer.

However, the UK Prime Minister, Theresa May’s hold on power is once again looking shaky. Theresa May was forced to accept a resignation from her UK transport minister on Friday and a second cabinet minister has also threatened the same. More ministers are rejecting a key part of the Brexit plan, which will enable Brussels to have joint say over the UK’s right to break free of the Irish backstop. Theresa May trying to force it through could lead to her downfall, or a flat-out rejection of the Brexit deal by Parliament, making a hard no deal Brexit more likely.

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.

Pound traders also digested mixed GDP data on Friday. Figures showed that UK economic growth maintained a healthy momentum in the third quarter, hitting a near two year high. However, business investment contracted unexpectedly. This shows that businesses were hesitant to invest amid growing Brexit uncertainty.

There is no UK economic data due for release today, so Brexit will continue to be the principal driving force.

Italian Budget Fears To Return?

Recent weakness in the euro has been due to growing concerns that that the eurozone economy is slowing. As a result, investors will be paying particular attention to eurozone ecostats across the week. Whilst there are no major releases due today, the calendar picks up through the week. German inflation figures, ZEW economic sentiment data, Eurozone growth projections and eurozone inflation numbers are all expected to offer further clues on the health of the Eurozone economy.

Concerns over Italy’s spending plans will also return to the spotlight this week. As Brussel’s deadline for a budget resubmission nears, Italy’s populist government is standing defiant, with few, if any, changes. Political risk could weigh on the euro.

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