A flash crash thanks to excessive market fears and thin holiday volume saw the pound plummet to €1.0947 versus the euro. This is the lowest that the pound has traded at versus the common currency since November 2017.
|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 fears combined with a souring global sentiment is making the pound look extremely unattractive to investors right now. Investors are becoming increasingly concerned of a no deal Brexit. UK manufacturing data today beat analysts’ expectations, unexpectedly jumping to 54.2 in December, up from 53.1 the previous month. The figure was also well ahead of the 52.5 that analysts had been forecasting.
Normally strong manufacturing data would send the pound higher. However, investors believe that the increase is down to front loading and stockpiling ahead of a no deal Brexit. Consequently, the stronger data and growing realisation that there could be a no deal Brexit pulled the pound sharply lower.
|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.|
Brexit will remain in focus as the UK Prime Minister visits some EU leaders in another attempt to secure assurances that the Irish backstop will be temporary. The pound will be sensitive to any headlines.
UK Construction data will also be in focus. Construction activity picked up to a four-month high in November, despite Brexit uncertainties. Investors will be keen to see whether the momentum has continued into December. Strong data could boost the pound.
|How does strong jobs data boost the currency?|
|It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the goods and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.|
The euro was broadly weaker in the previous session, albeit in higher demand than the pound. The selloff in the euro was more a story of dollar strength. The euro trades inversely to the dollar, so when the dollar rallies, the euro moves lower. The dollar soared higher in the previous session as investors bought into its safe haven properties. The dollar is the reserve currency of the world, so in times of deep uncertainty or fear, investors prefer to buy the dollar. As a result, the euro was broadly lower, even if it was higher versus the weaker pound.
There is no high impacting eurozone data due today, so the euro could continue to move at the will of the dollar.
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Inc., Currency Live or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. Consult our risk warning page for more details.
This article was initially published on TransferWise.com from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.