GBP/EUR: Pound Lower vs. Euro As PM May Gets Cabinet Backing & Braces

The pound surged to a session high against the euro on news that UK Prime Minister Theresa May had secured her Cabinets backing for the Brexit deal that she had negotiated. The pound euro exchange rate hit spiked to €1.1522, before actually closing lower on the day. The pound was also retreating in early trade on Thursday.

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 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 was very volatile in the previous session versus all of its peers as investor waited for the result of the crunch Cabinet meeting. Investors and political analysts alike knew that this was going to be an extremely difficult meeting for Theresa May. Particularly given the strong division in her Cabinet and the 10 or so hardline Brexiters. The pound rallied on Theresa May’s achievement. However, there is still a long road ahead and the pound dropped as investors weighed up the challenge that Theresa May faces across the coming weeks.

Market participants are growing increasingly concerned that a vote of no confidence is imminent as Eurosceptics show their discontent for the Brexit deal that has been forced upon them. Whilst interestingly there were no resignations on Wednesday evening, Theresa May hinted in her speech that she expects a severe political backlash from Wednesday’s meeting.

Should Theresa May see off her challengers, the Cabinet’s agreement paves way for a European Council extraordinary meeting on 25th November. Theresa May will then need to find a way to push the deal through Parliament. Analysts expect this to be immensely challenging and could stop the Brexit deal from taking place.

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.

Euro Rises Despite Growth Concerns

The euro was broadly in favour in the previous session. This was more to do with a weaker dollar than any specific euro strength. The euro often trades inversely to the dollar, so when the dollar drops the euro rallies.

Economic data out of Europe was a mixed bag. Eurozone GDP data printed as analysts expected at 1.7% year on year in the third quarter down from 2.2% in the previous quarter. This is the slowest pace of growth for 4 years, which unnerved investors. Furthermore, Germany which is often referred to as the powerhouse of Europe recorded much slower economic growth than analysts were expecting.

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.

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