Mixed Brexit developments and concerns over Italy allowed the pound to move higher versus the euro on Tuesday. The pound euro exchange rate moved 0.2% higher across the day, hitting a high if €1.1267 before easing back into the close.
|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.|
Pound traders digested mixed Brexit headlines in the previous session. Bank of England Governor Mark Carney made some optimistic comments when he appeared before the Treasury Select Committee. Mark Carney said that he still believed that the UK would experience a smooth Brexit and transition period. He also said that he considered that Theresa May’s Brexit deal would broadly be supportive of the economy. It would support investment and increase certainty for businesses, he said which would ultimately be good for the pound.
Along with encouraging comments from Mark Carney, pound investors were also watching growing tensions between UK Prime Minister Theresa May and the Irish DUP party. This is the party whose vote she relies on to keep her government running. However, the growing tensions don’t bode well for the DUP voting in favour of Theresa May’s Brexit deal when it goes to Parliament. These concerns kept any pound strength capped as a disorderly Brexit would be bad news for 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.|
On the data front, today investors cheered data from the Confederation of British Industry which showed that the UK manufacturing sector unexpectedly rebounded in November. Whilst this s good news, market participants are aware that the prosperity of manufacturing depends on a good Brexit deal. Today, in addition to Brexit developments, pound investors will look towards UK public sector net borrowing figures.
The euro slumped in the previous session as the potential for a clash increased between Italy and Brussels over Rome’s high spending budget. Today the European Commission will give its verdict on Italy’s spending plans. Furthermore the EC will produce a report over the levels of Italian debt. This report will enable the Commission to propose to other member states to begin a procedure against Italy for excessive debt. So far Italy has stood defiant and rejected calls by Brussels to lower it spending making a full on collision increasingly more likely.
|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.|
Today investors will be looking towards the OECD economic outlook. With fears over slowing growth in the region, investors will be particularly interested in an insight into the health of the economy.
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