Politics weighed on demand for both the pound and the euro at the start of the new week. Whilst both the pound and the euro were under pressure on Monday, the euro finished the session trading the lower of the two. The pound euro exchange rate closed at €1.1447, up 0.1% on the day.
|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.|
Brexit was once again under the spotlight, as pressure mounted on Theresa May. Pound traders were doubting of Theresa May’s ability to win parliamentary support for the Brexit deal that she has been negotiating with the EU. Reports from EU Chief negotiator Michel Barnier, that the Brexit Treaty text was almost ready to be presented to the UK cabinet sent the pound spiking higher. However, the rally was short lived as investors weighed up the size of the task for UK Prime Minister Theresa May’s to gain support from her ministers and push the deal through.
|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.|
Today the focus will remain on Brexit, as investors will watch intently to see whether Theresa May can gain sufficient backing from cabinet ministers. Investors will also look towards the UK jobs data. Analysts are expecting UK average weekly earnings to have increased to 3% in the three months to September, up from 2.7% the month previous. Analysts forecast average earnings, including bonuses, will remain constant at the elevated level of 3.1%. Strong earnings data point towards increased inflationary pressure in the future. Therefore, strong figures could boost the pound.
|How does strong jobs data boost the currency?|
|It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the goods and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.|
Demand for the euro was also low in the previous session. Brexit concerns are also knocking sentiment towards the common currency. Political concerns over Italy are another headache for the euro. Today is the deadline for the populist Italian government to resubmit its Budget. This comes after Brussels rejected Rome’s original Budget for flouting European Commission rules.
Whilst meetings in Rome have been in progress across yesterday, analysts are not expecting any major changes from the original Budget. Should this be the case the European Commission could consider imposing sanctions on Italy.
The eurozone economic calendar was quiet on Monday, however it picks up today. Investors will be looking towards German Inflation data and ZEW economic sentiment for the region. Analysts are forecasting German inflation to remain steady at 2.5%. However, analysts predict that economic sentiment declined in November. This could pull the euro lower.
|Why does poor economic data drag on a country’s currency?|
|Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.|
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.