Brexit uncertainty proved too much for pound traders on Tuesday. The pound fell versus the euro, hitting a low of €1.1251 before recovering slightly 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.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.|
Brexit uncertainty has been the principal driver of the pound for a while and the previous session was no different. The vote on Brexit in Parliament has been set for 11th December. UK Prime Minister Theresa May continues to try to drum up support from all corners of Parliament; her party and the opposition party. However, it appears that as she tries to win over MP’s to support her agreement, opposition against her is actually increasing. Even close former allies are labelling the deal as doomed and the worst of all worlds.
The EU have made it very clear that there is no going back to continue negotiating. The deal that is on the table is the only deal available. If Parliament vote against the deal, then the UK will almost certainly be heading towards a disorderly no deal Brexit. Business leaders and leading economists have frequently claimed that a no deal Brexit will be disastrous for the UK economy and consequently 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 the Bank of England will release the results of its latest stress test. Brexit will mean that investors will be watching the results more than any previous stress tests. UK banks showing capability of handling potential tough times ahead could offer some relief to pound traders as the chances of a no deal Brexit remain elevated.
The euro traded lower on Tuesday, albeit higher than the pound. As the dollar increased in value, the euro, which often trades inversely to the dollar, declined. Negativity surrounding the euro also increased with conflicting reports over Italy. Some reports suggested that Italy was prepared to back down to Brussels’ demands over the Italian budget and lower its budget deficit to 2.2%. However, other reports say that Rome will stick with its original spending plans which breach the European Commission’s rules. The lack of clarity weighed on demand for the euro.
Today German consumer confidence will be in focus. Analysts predict that German consumer confidence will edge marginally lower to 10.5 in December. A weaker reading could send the euro lower.
|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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