GBP/EUR: Pound Hit Almost 2 Year High As Parliament Rejects No Deal

News of a revised Brexit sent the pound soaring overnight. The pound euro exchange rate rallied to a high of €1.18. This was the highest the pound has traded at versus the euro since Spring 2017.

At the 11th hour and after a dramatic last minute dash to Brussels, UK Prime Minister Theresa May and European Commission President Jean- Claude Juncker, agreed to revisions to the Brexit deal. Theresa May will be hoping that the attempts at legal assurances over the Irish backstop will be sufficient to avoid another humiliating defeat in Parliament.

The meaningful vote on Brexit will happen later today. Leading into the vote, political analysts had said that it was unlikely that Theresa May would get the numbers she needed to push her deal through the House of Commons. It remains to be seen whether last night’s revisions will change this. Ministers will wait for a legal opinion from the Attorney General before deciding if the new document goes far enough.

Should Theresa May get ministers to agree to her Brexit deal, the pound could move higher. This is because the UK will have avoided a hard no deal Brexit; the type of Brexit that economists have often labelled as the most damaging to the UK economy and therefore 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.

Fears Over Eurozone Economy Persist

Concerns over the health of the eurozone and more specifically the German economy weighed on the value euro on Monday. German industrial production data was just the latest release to point to slowing economic growth in the block. German industrial production fell -0.8% month on month in January, down from -0.4% in December. Analysts had been expecting industrial production to pick up in Europe’s largest economy. The weaker than predicted data sent the euro lower.

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.

Today there is no high impacting eurozone data. On Wednesday, investors will be looking at eurozone industrial production figures. Analysts are forecasting that industrial production will increase in January by 1% month on month, after falling -0.9% in December. Another weak reading would further support the European Central Bank’s view that economic growth is slowing. The central bank will not consider raising interest rates whilst the economy slows.

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