GBP/EUR: Brexit Uncertainty Keeps Pound Demand Low vs. Euro

Brexit developments dominated movement in the pound, pulling the sterling lower versus the euro. The pound euro exchange rate dropped 0.2% across Wednesday, closing the session at €1.1086.

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.

With the Brexit withdrawal agreement being debated once again in Parliament, Brexit developments are coming in thick and fast. UK Prime Minister had been defeated twice in Parliament in as many days. This shows that she no longer commands authority in her party and could be a strong indication that she is likely to lose the vote on her Brexit deal next week.

Theresa May’s office has also publicly discussed for the first time what the PM would do in the case that her deal is voted down. This is the clearest sign yet, that she is losing momentum.

Yesterday’s defeat in Parliament means that Theresa May now will have just 3 days to set out a plan B should her vote be defeated in Parliament. This is down from the 21 days which was agreed only in December. Remainers are using all the tactics in their power to prevent the UK from crashing out of the EU without a deal. The declining prospect of a no deal Brexit should boost the pound. However, given that Parliament hasn’t spelt out what it sees the solution to be, the political uncertainty is hitting demand for 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.

Today the debate in Parliament will continue. With no economic data due the pound will be particularly sensitive to Brexit headlines.

Weaker dollar lifts euro

The euro was in demand in the previous session mainly owing to dollar weakness. The euro trades inversely to the dollar. When the dollar drops the euro rallies and vice versa. The dollar dropped sharply lower following a statement from Fed Official Bostic, who suggested that the Fed should be patient and may need to hike just once this year.

Why do raised interest rates boost a currency’s value?
Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.

Whilst the declining dollar boosted the euro on Tuesday, the euro could find that its gains are limited. This is because the outlook for the euro remains weak. The latest inflation reading showed inflation is down to 1.6%, falling away from the 2% target. Furthermore, economic growth is forecasted to decline, which could prevent the European Central Bank from raising rates later this year.

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