Monday saw some big swings in the pound as volatility remained elevated. After climbing across the morning the pound dived 70 points versus the euro, hitting a low of €1.1202. The pair closed the session down 0.1% on the day. The pound is edging higher in early trade today.
|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. 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.|
Brexit continued to dominate investors’ attention as the new week began. Reports suggested that UK Prime Minister was just eight letters short of a vote of no confidence. Those UK Conservative MP’S that had submitted a letter were openly campaigning to encourage other Conservative party members to do the same. Yet this was not what dragged the pound lower.
The pound tumbled lower when Theresa May said that the Brexit transition period should end before the next general election. This will be in May 2022. The Brexit transition phase was originally meant to last until 2020. However Chief EU negotiator Michel Barnier had suggested extending this until December 2022. A longer transition period would be more beneficial to UK businesses as they prepare themselves for the UK’s exit from the EU. Anything that is more beneficial to British businesses, supports the economy and is therefore more beneficial to the pound.
|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 investors will continue to watch developments in Westminster but for the time being the threat of a coup has fizzled. The BoE Governor Mark Carney appearing before the Treasury Select Committee could also be a welcomed distraction for pound traders. Here Mark Carney and three BoE officials will give their views on the current health of the economy. They can also expect to be questioned over how prepared the central bank is for a no deal Brexit.
The euro was broadly in favour on Monday as investors shrugged off growing tensions between Italy and Brussels. Euro finance ministers have expressed their concern over Rome’s budget row with the European Commission and are waiting for the EU’s next move before increasing pressure on Italy’s populist government.
The eurozone economic calendar is light again today with only German producer price index. Investors will be looking ahead to the second part of this week which sees the release of the OECD’s economic outlook and ECB policy meeting minutes.
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