GBP/EUR: Pound Rallies vs. Euro As No-Deal Threat Diminishes

The pound fell steadily versus the euro across the previous week, before surging higher on Friday, making up all the lost ground from the week and more. The pound euro exchange rate closed at €1.1204, its highest level since a spike higher on Christmas day. Sterling is moving higher as the new week begins.

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.

For example, it could be written: 1 GBP = 1.13990 EUR

Here, £1 is equivalent to approximately €1.14. This specifically measures the pound’s worth against the euro. 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 GBP

In 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 was driven by Brexit developments in Westminster, as the British Parliament debated the Brexit withdrawal once again. Increasing uncertainty dragged on demand for the pound as ministers showed less confidence in Theresa May’s Brexit plan.

The pound rallied hard on Friday following reports that Article 50 will be extended. Currently Article 50 dictates that the UK will leave the UK on 29th March 2019. However, if ministers can’t agree how the UK will leave the EU then an extension of Article 50 could help break the deadlock. This means that the UK could avoid crashing out of the EU with no deal — something very few ministers support.

The Brexit vote on Tuesday evening will be the headline event for the week. Should the vote be approved then processes will begin for the UK to leave with EU with a deal in March, starting with a transition period.

Current MP voting intentions suggest that Theresa May will lose the vote and by a wide margin. Under this scenario, Brexit uncertainty and chaos will continue, which could weigh on the pound. However, if investors consider that a “no” vote means Article 50 is likely to be extended, or a second referendum could be on the cards, the pound could move higher.

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.

Will Industrial Production Data Pull The Euro Lower?

The euro showed resilience in the early part of the previous week. The euro strengthened despite disappointing economic data, particularly from France and Germany, highlighting the possibility of a technical recession. This is when the economy contracts for two consecutive quarters.

Minutes from the European Central Bank monetary policy report were another negative for the euro. The central bank suggesting that the balance of risks was moving towards the downside was a cause for concern for euro traders, as the ECB could delay raising interest rates.

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.

Investors will be watching Eurozone industrial production (IP) data today. Analysts are expecting IP to have increased to 0.3% in November, up from 0.2% the previous month. However, with German and French IP having printed lower, there is a good chance that the eurozone figure will miss estimates. This could weigh on the euro.

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