The pound dropped in the previous session, as UK Prime Minister Theresa May learned of a potential blow to her Brexit plan. The pound declined versus the euro hitting a low of €1.1634, before regaining some ground to close at €1.1701.
|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 speaker in the House of Commons told Theresa May that she will not be able to put her Brexit deal to Parliament for a vote for a third time unless there are substantial changes to the motion. This news is a huge blow to Theresa May who was considering putting her Brexit deal up for a third meaningful vote as soon as today, and even a fourth if necessary.
The refusal to allow a third vote is owing to a procedural rule from 1604. This rule states that MP’s cannot be asked to vote again on a motion that is the same or substantially the same. This casts further doubt over what length of extension Theresa May will be able to get from Brussels, increasing Brexit uncertainties. With the deadline to Article 50 just 10 days away and the UK by default leaving without a deal, pound traders are growing nervous.
|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.|
In addition to Brexit, traders will also be watching the UK wages report. Analysts are expecting UK wage growth to remain elevated at 3.4% in the three months to January. A strong reading could offer some support to the pound.
|How does strong jobs data boost the currency?|
|It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the goods and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.|
The euro was trading broadly stronger on Monday, amid a jump in the trade surplus. This means that the eurozone exported more than it imported. This a good sign for the economy and is an inflationary pressure.
Whether this strength can continue across Tuesday could depend on economic sentiment data which is due to be released. The ZEW economic sentiment data is a closely watched indicator. Investors will be particularly keen to see how economic sentiment in Germany is holding up as the country narrowly avoided recession. German business sentiment has been depressed and in negative territory although, February saw the index edge towards a 5 month high at -13.4.
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