Brexit uncertainty weighed on demand for the pound on Wednesday. The pound euro exchange rate dropped 0.3% across the session to close at €1.1689. The pound is edging higher in early trade today.
|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.|
In the night of drama at Westminster, Theresa May was unable to break the deadlock over Brexit and ministers were unable to agree on a Plan B. Theresa May offering to stand down from position as Prime Minister earlier than she intended should her Brexit deal be accepted helped her win over some Eurosceptic supporters. However, it is still looking as if she will struggle to get her deal through Parliament, as the DUP remain strongly against Theresa May’s Brexit plan.
The House of Commons was able to come up with a Plan B for Brexit either. This leaves the UK’s plans for leaving the EU in chaos. Ministers failed to agree on any of the 8 Brexit options presented. A second referendum was the closest to winning a majority, with 268 votes in favour and 295 against. Pound traders remain optimistic of a softer Brexit.
|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.|
With a light UK economic calendar, Brexit discussions will remain the central focus.
The euro traded broadly lower in the previous session. Concerns over the Italian economy surfaced again on Wednesday. Reports point to the Italian economy stagnating over the long term, in a “perma recession”. Thanks to low productivity, spiralling debt and monetary policy ill-suited to the country’s needs, Europe’s third largest economy is in danger of experiencing no economic growth for a long period of time.
Italy has already experienced a technical recession, with the economy contracting for 2 consecutive quarters. The fear is that the nation will remain around these levels of non- existent growth for a much longer period.
Germany will be back in the spotlight today as investors look towards German inflation. Analysts predict that German inflation will remain steady at 1.5% in March year on year. They also forecast inflation increasing 0.6% month on month, up from 0.4%. A pick up in inflation could boost hopes for an interest rate rise and therefore lift the euro.
|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.|
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