GBP/EUR: Pound Through €1.14 vs Euro On No Brexit Optimism

As UK Prime Minister Theresa May continued cross party Brexit talks, the pound climbed higher. The pound euro exchange rate increased 1% across Thursday’s session, hitting a peak of €1.1411. This is the strongest level that the pound has trade at versus the euro for 2 months.

Following a landslide defeat on her Brexit bill and after surviving a vote of no confidence called by the opposition party, Theresa May is holding cross party Brexit talks. Her aim is to put together a Brexit Plan — B that is more palatable for Parliament. She will need to present the Plan on Monday. Theresa May has delayed the debating of the plan in Parliament until 29th January. It will be voted on the same day.

Rival parties are joining Theresa May for Brexit talks. However, main opposition party leader Jeremy Corbyn is boycotting the talks. He said that a second referendum remains an option. A second referendum is the favoured option for the pound, with the hope that Brexit would then be cancelled. Investors are growing increasingly optimistic that Brexit just won’t happen.

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 has been the central focus this week. Investors have paid little attention to UK economic data, including highly influential inflation reading. Today, Brexit headlines will continue to drive the pound. A lull in news could allow investors the opportunity to look towards UK retail sales.

Analysts are expecting UK retail sales to remain constant at a solid 3.8%. This would be a strong reading implying that consumers are still spending, despite Brexit uncertainties. This would be good news for the UK economy and for the pound.

Eurozone Inflation Weighs On Euro

The euro struggled in the previous session following a decline in inflation. Data showed that consumer prices dropped in December to 1.6%, down from 1.9% the previous month. Core inflation, which excludes more volatile items such as food and fuel remained steady at 1%. Inflation is falling away from the European Central Bank’s target of 2%. Economic growth is also showing signs of losing momentum. The ECB will have problems justifying a rate rise under these circumstances. As a result, the euro was under pressure.

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.

Today thee is no high impacting eurozone data for euro investors to turn towards. This will leave the euro trading at the will of the pound and the US dollar, to which it trades inversely.

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