Brexit uncertainties increased last week as the UK Parliament rejected Prime Minister (PM) Theresa May’s Brexit deal. However, the pound still gained 1.1% versus the euro, thanks in part to weak eurozone data. The pound euro exchange rate climbed to a high of €1.1406 on Thursday. This was the first time that it had breached €1.14 since November. The pair slipped away from the high on Friday and has continued falling 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.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 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.|
Demand for the pound was remarkably strong in the previous week, despite the PM’s Brexit deal being vote down by the House of Commons. As Theresa May’s Brexit suffered a crushing defeat, the pound rose. Rather than viewing the defeat as taking Brexit a step close to a no deal Brexit, market participants considered it a step closer towards Brexit being delayed. A pushing back of Brexit leaves more time for a second referendum, a softer deal, or even Brexit not ever happening.
The pound fell away from the highs on Friday after UK retail sales data was softer than what analysts were expecting. Retail sales contracted by -0.9% in December, down from 1.3% growth in November. The weak festive period retail sales figures reminded pound traders that the UK economy as not in a good place.
Today Theresa May will be presenting her Plan- B for Brexit. A plan which needs to please both Westminster and Brussels. Pleasing both sides appears to be an impossible feat right now and will prompt volatility in the pound. Hints of moving towards a softer Brexit or delaying Brexit could boost the pound. A step closer towards a hard, no deal Brexit could send the pound 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.|
Demand for the euro was hit in the previous week, owing to weak eurozone economic data. The weaker data fuelled growing concerns over the health of the eurozone economy. Investors can’t shake off the fear that economic growth in the eurozone economy is losing momentum.
Should economic growth slow, the European Central Bank (ECB) will struggle to find reason to hike interest rates later this year as initially planned. This will weigh on demand for the euro.
|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 this week’s releases closely. Consumer confidence data will dominate the first part of the week. The ECB monetary policy announcement on Thursday will then give investors a clearer understanding of where the ECB re heading with monetary policy.
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