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GBP/EUR: BoE In Wait And See Mode?

21st March 2019

UK Prime Minister requesting a short extension to Article 50 and the EU potentially refusing it sent the pound crashing lower on Wednesday. The pound euro exchange rate dropped over 1.1% to close at €1.1556, a 10-day low. The pair was inching higher 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. 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.

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.

The pound dived in the previous session after Theresa May requested a short extension to Article 50. Brussels confirmed that they won’t be able to discuss the extension at the summit today. This means that the UK will be waiting for a decision with just days to go to the cliff edge deadline of 29th March. The EU have also suggested that they might only agree to extend the deadline if MP’s back Theresa May’s Brexit deal. The prospect of a hard Brexit has increased dramatically, and this is weighing on demand for 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.

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.

The Brexit drama meant that investors as good as ignored UK inflation data. Consumer prices lifted in February to 1.9%, up from 1.8% the month before. This in addition to the strong wage growth figures earlier in the week will have caught the eye of the Bank of England prior to the monetary policy announcement on later today.

With Brexit still clouding the outlook, the BoE’s hands are tied. With no clarity over whether the UK will leave the EU with or without a deal, the central bank could remain in wait and see mode for a little longer.

Euro Strengthens On Weaker Dollar

There was no high impacting eurozone data released on Wednesday. As a result, the euro traded at the will of the dollar. The Fed kept rates on hold, as analysts expected. However, they doubled down on dovish rhetoric. As a result, the dollar dived. The euro trades inversely to the dollar. When the dollar drops, the euro rallies.

Today investors will switch their attention back to the eurozone. The European Central Bank will release its Economic Bulletin, this could add pressure to the euro given the weak data from the region and more particularly Germany over the past month.

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