GBP/EUR: Pound Tumbles Ahead Of Uncertain Brexit End-Game

The pound fell sharply against the euro at the end of last week. The pound euro exchange rate fell 0.9% on Friday. This mean that the rate fell 0.2% across the week, closing at €1.1581. The pound was extending losses versus the euro at the start of the new week.

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.

For example, it could be written: 1 GBP = 1.13990 EUR

Here, £1 is equivalent to approximately €1.14. This specifically measures the pound’s worth against the euro. 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.

UK economic data painted a dismal picture, last week, weighing on the value of the pound. The UK construction sector slipped into contraction in February, whilst the UK manufacturing sector slowed once again. Activity in the dominant UK service sector increased in February although remains close to a standstill.

In addition to weak data, Brexit anxieties also hit demand for the pound. UK Prime Minister Theresa May made a last-ditch attempt to secure the legally binding changes to the Irish backstop arrangement that Parliament requested.

This week is a big week for Brexit and the pound. UK Parliament will vote on a series of Brexit bills which will decide the future course of Brexit. The meaningful vote will take place on Tuesday. Political commentators expect Theresa May’s Brexit vote to be defeated for a second time in the House of Commons. They expect the margin to be slimmer than the 230 votes last time.

Should the deal be rejected, Parliament will vote on a no deal Brexit on Wednesday. Should that be defeated ministers will vote on extending Article 50 on Thursday. Any moves towards a softer Brexit could help boost the pound. A move towards a hard no deal Brexit could pull the pound sharply lower.

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.

Will German Industrial Data Pull Euro Lower?

Dovish words from European Central Bank President Mario Draghi, hit demand for the euro in the previous week. The central bank downgraded its outlook for inflation and growth across the bloc for this year and next. Additionally, Draghi said that the ECB would not be looking to raise interest rates until 2020, later than the initial plan for summer 2019. As interest rate expectations were pushed back, the euro declined.

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 euro received a boost on Friday as the dollar dived on weak jobs data. The euro trades inversely to the dollar. When the dollar declines the euro rallies.

German industrial production data will be in focus today. Germany’s industrial sector has been badly hit by slowing global growth and Brexit. Market participants will be keen to see asses the health of the sector in Europe’s largest economy.

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