News that the UK and the EU had agreed a draft text setting out a close, post Brexit relationship sent the pound sharply higher on Thursday. The pound euro exchange rate hit a peak of €1.1306. This was its highest level in almost a week. The pair is has slipped lower in early trade on Friday.
|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 rallied on news of a “ambitious, broad, deep and flexible” future partnership between the UK and Brussels. After 18 months of political wrangling Theresa May finally had something to please pound traders. The text which outlines the future ties between the UK and the EU is extensive and covers wide ranging points from trade liberation to co-operation between police. However, it did stop short of Theresa May’s frictionless trade. Still, the pound rallied thanks to the ambitious tone of the text. This agreement over the future relationship should be a significant help to UK Prime Minister Theresa May as she attempts to push the Brexit deal through Parliament.
Parliament will vote on the Brexit treaty and the draft agreement laying out the future relationship as a Brexit deal package. The Brexit treaty almost resulted in Theresa May losing power. This most recent document is more supportive of an optimistic future with close ties to the EU and trade deals outside of it. Boosting the chances of a Brexit package being agreed, the pound rallied.
|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.|
There is no UK economic data due for release today, so investors will remain focused on remaining issues with Brexit, such as Gibraltar.
The mood for the euro was broadly strong on Thursday, albeit weaker than that for the pound. Euro investors watched the release of the European Central Bank (ECB) minutes closely on Thursday. Given the slowing growth momentum in the eurozone, some market participants were nervous that the ECB would consider changing their planned course of halting the asset purchasing programme in December. However, the minutes showed that whilst ECB policy makers acknowledged the slowing growth, they unanimously voted to stick with the current plan owing to on target inflation. This means that market expectations for a rate rise late next year remains intact.
|Why do raised interest rates boost a currency’s value?|
|Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.|
Today German GDP data and a slew of eurozone pmi figures will be the central focus for euro traders.
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.