The pound gained 0.8% versus the euro across the previous week as Brexit sentiment remained marginally positive despite domestic political turmoil increasing. The pound was extending its gains as the new week started, pushing higher versus the euro.The pound was steady at €1.1523 versus the euro as the new week kicked off.
|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 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 UK political landscape fractured in the previous week with ministers from both Labour and Conservatives joining the newly formed Independent Group. This means both parties are even more vulnerable in future votes in the House of Commons; a majority could be even harder to achieve. Political commentators believe more could still defect. Added to this, there were reports over the weekend that over 100 MP’s have threatened to revolt and demand that UK Prime Minister Theresa May delays leaving the EU if a no deal Brexit remains an option.
Yet, despite all the political turmoil the pound still managed to climb higher, thanks in part to impressive UK jobs numbers. However, this means that sterling could be at risk of a greater downturn should the EU and the UK fail to break the impasse over the Irish backstop arrangement.
Theresa May pledging to put the final Brexit vote to Parliament on 12th March has helped lift the pound broadly higher at the start of the week. The PM said she still believes it’s possible to leave the EU with a deal on 29th March. Theresa May set the deadline as a way to evade MP’s attempts to extend Brexit talks. The fact that an orderly Brexit is still on the table sent the pound higher.
|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 under pressure across the previous week thanks to a more cautious tone from monetary policy makers at the European Central Bank (ECB). The minutes from the latest ECB meeting in January showed that policy makers were considering loosening monetary policy rather than hiking rates going forwards. This is because growth momentum has slowed considerably in the eurozone, particularly in Germany, in the face of Brexit and slowing global growth.
|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.|
The start of the week is quiet as far as eurozone economic data is concerned.The euro could find strength from a weakening dollar. The euro often trades inversely to the dollar. Eurozone economic releases pick up towards the end of the week with inflation figures from both Germany and the eurozone in focus, in addition to German unemployment data on Friday.
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.