The U.K. Prime Minister Theresa May postponed the Brexit vote in Parliament on Monday sending the pound plummeting across the board. The pound tumbled 0.9% versus the euro, hitting a low of €1.1005. This is the lowest level that the pound has traded at versus the euro for 4 months.
|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.|
Theresa May canceled the meaningful vote in Parliament which was due to take place this evening. Political analysts were reporting that Theresa May was due to lose the vote in Parliament by such a large margin that the only option, for the sake of her political career, was to postpone the vote. Theresa May will go back to Brussels in an attempt to renegotiate the Brexit deal or more particularly the Irish backstop, which for most ministers is unpalatable.
This move by Theresa May has increased the level of uncertainty surrounding Brexit. Pound investors will remain extremely nervous, which will keep pressure on the pound until there is a clearer understanding as to how the Brexit deal will proceed.
|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.|
Brussels have been clear that they have no intention to renegotiate. Theresa May has gone back to the EU in the hope that they will change their mind. Headlines over the coming days will indicate whether she has been successful or not.
Amid all the Brexit turmoil, investors could turn their attention briefly over to the economic calendar. UK jobs data is due to be released. Analysts are expecting weekly earnings to remain steady at 3.2% in the three months to October. Analysts forecast that the unemployment rate will remain at 4.1%.
Whilst the euro found support in the previous session from solid German trade surplus data. Analysts are not expecting data to support the euro in today’s session. Analysts are expecting the ZEW (Zentrum fÃ¼r EuropÃ¤ische Wirtschaftsforschung, or the Center for European Economic Research) economic sentiment survey to show that economic confidence soured again in December in both Germany and the wider eurozone. This would support growing fears that economic growth momentum is glowing in the region.
|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.|
Beyond today’s figures, investors will be looking cautiously towards the European Central Bank’s policy announcement on Thursday. Given recent weakness in eurozone data, investors are increasingly nervous that the ECB will adopt a more cautious stance, leaving interest rates on hold for the foreseeable futures.
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