The pound euro exchange rate tumbled across most of last week. The pair lost over 1.2% as no deal Brexit fears persisted and data showed the worsening impact of Brexit on Britain’s economy. After starting the week at €1.1569 the pound moved southwards, hitting a low of €1.1385 on Friday.
|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 GBPIn 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.|
The pound fell across the previous week as Parliament was unable to push Brexit in a fresh direction. There are growing concerns that a no deal Brexit could still happen as the clock ticks towards the March 29th deadline.
Theresa May will now head back to Brussels this week in an attempt to renegotiate the Irish backstop arrangement of the Brexit deal. However, she faces a tough challenge as Brussels has repeatedly said that it is not prepared to re-open negotiations. Should the EU persist with this line then the pound could struggle to move higher.
As Brexit concerns took centre stage, the negative impact of Brexit fears on the UK economy was also present. UK manufacturing activity disappointed in January, slipping to 52.8, well below the 53.5 that analysts had pencilled in. With the global economy also slowing, investors fear a recession could hit the UK manufacturing sector. Car maker Nissan have also decided to withdraw production of a new model from Sunderland amid no Brexit fears.
Today investors will continue to watch for Brexit headlines out of Brussels. Should the EU show any signs of softening their stance, the pound could rally as hopes of avoiding a hard Brexit would grow.
|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.|
Attention will also swing towards the construction pmi on Monday. Followed by the service sector data on Tuesday and the Bank of England policy announcement on Thursday.
The euro strengthened versus the pound, despite economic data from the region which indicated that the eurozone economy was slowing. Italy entered another technical recession, it’s third in a decade. Data from Germany also pointed to a more drawn out economic slump than market participants had originally thought.
Eurozone data will continue to be in focus this week. Investors will look for further clues of a slowdown in the region. Eurozone retail sales on Tuesday will be the first test for the euro. German factory orders on Wednesday could also rock the euro, with weak data denting demand for the common currency.
|Why does poor economic data drag on a country’s currency?|
|Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.|
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.