GBP/EUR: Pound Slides Following UK PM May's Brexit Defeat

As Brexit nerves took hold and UK Prime Minister Theresa May suffered another humiliating defeat in Parliament, the pound edged steadily lower versus the euro. The pound euro exchange rate dropped to a low of €1.1313 despite, German GDP data disappointing.

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. 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.

The pound dropped surely and steadily across the previous session and continued to decline after Theresa May experienced another embarrassing defeat in the House of Commons. Theresa May lost the support of Parliament for her Brexit plan B. Her political maneuvering has angered both Eurosceptics and pro-Remainers in the conservatives. As a result she lost the vote allowing her to continue to try to renegotiate the Irish backstop arrangement in her Brexit deal.

This means that the UK is still heading towards Brexit on 29th March with no Brexit deal in place. Given that a no deal Brexit is the worst outcome for UK businesses and the UK economy, the pound was under pressure.

Today pound traders will remain fixed on Brexit headlines. Particularly because the next steps of Brexit remain unclear. Any signs or optimism that the UK will avoid a disorderly Brexit could boost the pound.

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.

Euro Solid On Dollar Weakness

The euro remained firm despite German GDP disappointing at 0%. Analysts had been expecting economic growth in Europe’s largest economy to have picked up in the fourth quarter after contracting in the third quarter of the year. However, investors were happy to shrug off Germany narrowly avoiding recession.

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.

The euro found strength from dollar weakness. The euro trades inversely to the dollar. The dollar was weaker on Thursday as investors grew increasingly concerned over the health of the US economy. The weakest retail sales figures in 9 years sent a shiver through the markets. Investors are fearing that the slow down in the US economy could be worse than initially feared. As the dollar slid, the euro rallied.

Today there is no high impacting eurozone or German economic data to drive movement in the euro. Instead the euro will trade at the will of the dollar and the pound.

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