GBP/EUR: Pound Holding Firm vs. Euro After EU Leaders Sign Off Brexit

Brexit optimism and weak Eurozone data lifted the pound versus the euro on Friday. The pound euro exchange rate closed 0.1% higher at €1.1301. This helped the pound trade 0.5% higher versus the euro across the week.

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.

The pound rallied at the end of last week following the leak of the Brexit draft agreement. The agreement, whilst falling short of UK Prime Minister Theresa May’s frictionless trade idea, was extensive and ambitious. Marker participants believed that the draft agreement, will help Theresa May push the Brexit package through Parliament. The Brexit package also includes the Brexit treaty which has been less favourably received and almost cost Theresa May her political life.

The terms of the UK leaving the EU were signed off by European leaders at the European Council meeting on Sunday evening.

The next step is the Brexit vote in Parliament, which is just two weeks away, on December 8th. Theresa May will now campaign for a hard to sell the Brexit deal. She will convene with her cabinet ministers today to discuss how to avoid defeat. Analysts are expecting the next fortnight to be an uphill struggle for May, as the deal pleases neither Leavers or Remainers. If the deal does not get sufficient votes in Parliament the alternative is a hard, no deal Brexit.

Investors will be carefully trying to gauge the mood towards the deal across the country. Any signs of increased support for Theresa May’s Brexit plan could see the pound rally.

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.

Will Eurozone Business Sentiment Decline Again?

The euro has been under strain in recent sessions as more signs of slowing momentum in economic growth emerge. Last week data showed that consumer confidence in the eurozone dropped by more than analysts had been anticipating. Fears over a slowdown then intensified on Friday as data showed that business activity sank to its lowest level in four years. This threw doubt on the European Central Bank’s (ECB) ability to halt its quantitative easing programme next month.

Today, Ifo business climate data could drag the euro lower. Analysts are predicting that business confidence has decreased in November after falling October and September. Trade tensions remain a problem for German exports.

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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