The pound slumped below €1.1200 headings into the weekend, down 0.76% across the week. The pair hit a low of €1.1150, its weakest level in 10 weeks as investors looked nervously to the Brexit vote this 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.|
Last week the pound experienced large-scale volatility as Brexit developments came through thick and fast. At the beginning of last week, the European Court of Justice suggested that the UK could cancel Brexit unilaterally. The final vote from the ECJ is expected today. Parliament also voted to take control of the next stages if Theresa May loses the vote. This development boosted the chances of Brexit not happening at all or a very watered-down version, lifting 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.|
Whilst the developments boosted the pound, its effects were short-lived, overshadowed by negative comments from Bank of England Governor Mark Carney. Mark Carney highlighting the damaging impact of Brexit on the economy and an economic contraction of 8% next year in a worst-case scenario. These forecasts pulled the pound lower.
This week the pound is facing one of its most important weeks since the Brexit referendum back in June 2016. After two years of negotiating the Brexit draft agreement will be voted on in Parliament on Tuesday 11th December at around 20:30 GMT. Political commentators and analysts are expecting Theresa May to lose the vote in Parliament opening the door to significant uncertainty for the UK economy and therefore the pound.
The euro pushed higher versus the pound on Friday, despite eurozone GDP data coming in weaker than analysts had forecast. Economic growth in the eurozone grew at its slowest pace in 4 years in the third quarter of 2018. The GDP grew 0.2% quarter on quarter and just 1.6% year on year. This is down from 1.7% in an earlier revision. The data has done little to calm investor concerns over slowing momentum in the eurozone.
|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.|
Investors will be looking keenly ahead to the European Central Bank monetary policy meeting later this week. Investors will want to see whether the ECB is concerned by this economic slowdown and whether it will impact monetary policy going forward.
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