Investors nerves were put to the test on Thursday amid continued chaos in Westminster. The pound euro exchange rate dropped to a low of 1.1616. This is the lowest level that the pair has traded at in a week. The pound rebounded in early trade on Friday.
|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.|
Brexit uncertainty weighed on demand for the pound in the previous session. With just two weeks to go until the Brexit deadline, the UK government doesn’t appear to be any closer on deciding a way forward for Brexit. From 8 alternative Brexit options, the House of Commons failed to vote for even one with a majority. Looking at a breakdown of the votes there was a preference towards a softer Brexit and towards a second referendum, however not even these options secured a majority.
Theresa May will put her Brexit deal to Parliament for a third and final vote today. By offering to resign ahead of the next stage of Brexit, Theresa May has gained some support from Eurosceptics such as ERG leader Jacob Rees-Mogg and former foreign secretary Boris Johnson. However, the DUP have not been swayed and insist they will not support Theresa May’s deal. It therefore looks unlikely that Theresa May’s deal will pass. Without Theresa May’s deal, without a Plan B and with the default option still being a no deal, pound traders are starting to get 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.|
The euro was broadly weaker in the previous session, although not as weak as the pound. Soft German inflation data dented the mood for the common currency. Analysts had been expecting German inflation to remain steady in March at 1.5% year on year and actually increase 0.6% on a monthly basis. Market participants were left disappointed with an annual print of just 1.3%.
With inflation in the eurozone’s largest economy slipping further away from the central bank’s target of 2%, the probability of an interest rate hike is being pushed back into the future.
|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.|
Today the focus will remain on Germany, this time on the labour market. Analysts are predicting that unemployment will fall to 4.9% down from 5%. More people being employed is good news for the economy and is a sign of economic strength. A strong reading today could help lift the euro.
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Inc., Currency Live or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. Consult our risk warning page for more details.
This article was initially published on TransferWise.com from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.