The pound climbed higher versus the euro for a fourth straight session on Wednesday. Brexit optimism continued to fuel a rally in the pound. The pound euro exchange rate jumped to a high of €1.1724, it’s highest level since May 2017. The pair have eased back below €1.17 in early trade on Thursday.
|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.|
Hopes that the UK will avoid a disorderly Brexit lifted the pound once again in the previous session. Brexit hardliner MP Rees-Mogg showed to have softened his stance against UK Prime Minister Theresa May’s Brexit deal by dropping key demands over the Irish backstop arrangement. The change in stance from Brexit hardliners comes after Theresa May said she would give a vote to Parliament to remove the no deal Brexit option off the table. This means that it would no longer be Theresa May’s Brexit deal or no Brexit deal. Instead it is looking to be Theresa May’s Brexit deal or a delay to Brexit. Brexiteers would prefer the UK to leave the EU than delay Brexit. This means that the chances that Theresa May’s deal could get voted through Parliament on 12th March are increasing.
Theresa May’s deal is a softer version of Brexit and includes a two-year transition period for businesses to adjust. This is more pound friendly than a hard-disorderly 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.|
Consumer confidence data could dampen demand for the pound today. Analysts expect consumer confidence to fall in February amid continued Brexit uncertainty.
The euro was under pressure in the previous session as sentiment in the bloc fell for the eighth straight month. Economic confidence declined to 106.1 in February, this was a smaller drop than what analysts were expecting, thanks to a solid service sector. The data suggests that the recent slide in sentiment thanks to the US — China trade war could finally be bottoming out.
The eurozone has suffered from a slew of weak data over the past few months which suggests that the eurozone economy is losing momentum. The European Central Bank (ECB) have also acknowledged that risks are growing to the downside. Softening economic data and growth means the chances of the ECB raising interest rates anytime soon is very unlikely, and as a result the euro fell.
|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 is another busy day for eurozone economic releases. Investors will be watching closely, particularly German inflation figures, for further clues on the health of the economy.
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