Strong German inflation data and concerns over Theresa May’s ability to bring home a more palatable Brexit deal drove the pound euro exchange rate on Thursday. The pair dropped to a low of €1.1646 snapping a four-day winning streak with saw the pound rally to a 21-month high.
|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.|
Pound traders were pausing for breath on Thursday, after rallying over 1.5% across the previous four sessions. Optimism following Theresa May’s offer to Parliament to vote on a no deal Brexit or to delay Brexit, should her Brexit deal be defeated in a meaningful vote, has boosted the pound across the week. However, on Thursday concerns over the rate of progress during talks in Brussels was dampening sentiment towards the pound.
A government spokesman confirmed that there was still a lot of work to be done in negotiations to make the Brexit deal more palatable for British ministers. Theresa May is trying to ensure that the UK will not be trapped within the EU’s grasp indefinitely. She is therefore trying to seek changes to the Irish backstop arrangement to such effect. Failure to achieve this could see her deal defeat again in a meaningful vote on 12th March.
|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 investors will be looking towards UK manufacturing PMI data. Analysts are predicting that activity in the UK manufacturing sector will dip to 52 on the index. Down from 52.8 in January, where 50 separates expansion from contraction. Weak numbers could pull the pound lower.
The euro was enjoying a rare show of strength in the previous session. Market participants cheered inflation data from Germany which showed that prices increased at a faster rate than what analysts had been forecasting in February. German CPI remained steady at 1.6% year on year in February, up from 1.4% in January. This was also ahead of the 1.5% forecast although still below the European Central Bank’s 2% target.Investors were happy to cheer the surprise to the upside. However, the data is unlikely to encourage the ECB to start tightening monetary policy anytime soon, which could keep any euro rally capped.
|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 investors will look towards Eurozone inflation figures. Analysts are predicting that inflation in the bloc will have also risen slightly to 1.5% year on year.
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