The pound rallied strongly on Wednesday as Britain moves closer to delaying Brexit. The pound euro exchange rate rallied 0.7% in the previous session, before extending those gains in early trade on Thursday and hitting a fresh 2 month high of €1.15.
|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.|
British Parliament continue to move slowly towards a plan to delay Brexit as a means of avoiding the UK crashing out of the EU without a deal. Since PM Theresa May’s crushing defeat in the House of Commons last week, pound investors have been turning their attention to the possibility of Article 50 being pushed back from 29th March. More and more politicians are backing the idea. Theresa May, whilst not supporting the extension has not ruled it out either.
Delaying Brexit means a no deal Brexit is less likely. It would give the government more time to secure a better deal or could mean that Brexit simply doesn’t happen. All these options are more favourable to the pound than a no deal, hard 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.|
Today there is no UK economic data. Investors will once again be glued to Brexit developments.
Will A Dovish Draghi Pull The Euro Lower?
The European Central Bank’s (ECB) monetary policy decision will be announced today. Analysts are not expecting the central bank to make any changes to policy. Trader attention will focus on President Draghi’s press conference following the announcement.
Recent data from the Eurozone has been weaker than analysts had forecast. Inflation is down to 1.6%, falling away from the ECB’s 2% target and economic growth is losing momentum. ECB policy makers considered risks to be broadly balanced and tilted towards the downside.
Uncertainties linked to global trade and politics mean that the ECB could put off raising interest rates until 2020. Previously the ECB pointed to the third quarter of 2019 as a potential moment for a rate rise. A more dovish tone to President Draghi’s speech could send the euro lower as investors push back the chances of an interest rate rise.
|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.|
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Inc., Currency Live or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. Consult our risk warning page for more details.
This article was initially published on TransferWise.com from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.