Sterling rallied across the board on Monday, following news of Prime Minister Theresa May’s Brexit plan -B. The pound surged 0.2% against the euro on Monday, hitting a high of €1.1356.
|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.|
Theresa May’s Plan B was actually a version of Plan A. Theresa May continued along the familiar lines of no to taking Brexit off the table, no to a second referendum and no to delaying Brexit. Theresa May’s Plan B appears to be talking ministers in Plan A.
The PM said that she would return to Brussels in search of further re-assurances over the Irish backstop issue. Whilst Poland suggested a 5-year limit should exist. Ireland said there should be no limit. This was then followed by a complete rebuff from EU Chief negotiator Michel Barnier, who insisted again that there was no more negotiating to be done.
The pound moved higher through Theresa May’s speech, as it did in the previous week when Parliament rejected the Prime Ministers Brexit deal. With no, or very few changes to the plan, investors are considering that no Brexit is more likely than a no deal Brexit.
|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 headlines will continue to move the pound. However, investors will also look towards UK wage growth data for clues as to the health of the UK economy. Analysts are predicting the UK earnings increased 3.3% in the three months to November. This would be in line with October’s reading and a sufficiently high reading to boost the pound.
The euro was out of demand in the previous session following yet more disappointing data from Germany. German producer price index (PPI), which measures inflation at wholesale level fell by more than analysts had been expecting in December. PPI fell by -0.4% month on month, well below the -0.1% decline forecast.
This is just the latest round of soft data from Germany or the eurozone. Investors are concerned that the European Central Bank (ECB) will struggle to justify increasing interest rates later in the 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.|
Today euro traders will look towards ZEW economic sentiment index for both Germany and the Eurozone. Analysts are expecting sentiment to have declined once again. This could pull the euro lower.
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