The pound rallied versus the euro across the session on Wednesday as investors assumed UK Prime Minister Theresa May would win the vote of no confidence. The pound rallied to a high of €1.1148 on the news of her win before steadily falling lower.
|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.|
UK Prime Minister Theresa May survived a coup against her by her Eurosceptic, conservative ministers. She won the vote of no confidence with 200 votes versus 117 against her. The numbers show just how divided her party is over her leadership and the direction of Brexit. The reduced political risk lifted the pound.
|How does political risk have impact on a currency?|
|Political risk drags on the confidence of consumers and businesses alike, which means both corporations and regular households are then less inclined to spend money. The drop in spending, in turn, slows the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. Signs that a country is politically or economically less stable will result in foreign investors pulling their money out of the country. This means selling out of the local currency, which then increases its supply and, in turn, devalues the money.|
The surge in the pound was relatively short lived, though. Pound traders have quickly swung their attention back to the job at hand — Brexit. This vote served to show the challenge that Theresa May has in front of her if she is to push the Brexit vote through Parliament. Theresa May must convince those 117 conservatives to support her Brexit deal if there is to be any hope of it making it through Parliament. This will not be an easy job. The pound traders are aware of that which is why the currency is under pressure this morning.
ECB to End Bond Buying Programme
The euro struggled to build momentum in the previous session following the release of industrial production numbers. Industrial production accelerated 0.2% in October, in line with analysts estimates. However, a downward revision for September from -0.3% to -0.6% hit demand for the common currency.
|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.|
Today investor attention will be fixed squarely on the European Central Bank’s (ECB) monetary policy announcement. Whilst analysts are not expecting the ECB to raise interest rates, the central bank is expected to end its bond buying programme.
The ECB started buying up bonds on a massive scale to help overcome economic stagnation. Last year the eurozone grew at the fastest pace since the financial crisis. However, the ECB will be removing support as signs of economic growth weakening have returned. A cautious message from ECB President Mario Draghi, even as the central bank ends the bond buying programme, could drag the euro lower. This is because investors will view a dovish Draghi as pushing back on raising interest rates beyond current expectations, after the summer of 2019.
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