GBP/EUR: Pound Lower Amid Deepenig Brexit Division

Pressure was on the pound in the previous week after another episode of fraught Brexit negotiations and a third failed attempt to push Prime Minister Theresa May’s Brexit deal through Parliament. The pound fell 0.5% versus the euro across the week to close at €1.1618. The pound euro exchange rate drifted lower at the start of the new week.

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 pound plummeted on Friday following a third attempt by Theresa May to get her Brexit deal approved by Parliament. With no alternative arrangement agreed the UK is set to leave the EU on 12th April with no deal.

Theresa May’s future is in doubt as her level of authority is at an all-time low. A snap general election is looking likely. This would be the third general election in four years, more political instability will not be viewed favourably by pound investors. Meanwhile, Parliament plans to seize control of Brexit on Monday as it continues to vote on alternative Brexit options to Theresa May’s deal. Theresa May’s cabinet is deeply divided with the Brexiteers insisting that she should allow the UK to leave without a deal. On the other hand, the pro-Remainers are threatening to quit should a no deal Brexit become policy.

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.

PMI readings could also attract attention at the beginning of the new week. Analysts are expecting data to show the continued negative impact of Brexit on the UK economy. Analysts forecast that the manufacturing PMI on Monday will show the sector falling further into contraction. This could pull the pound lower.

Could Eurozone Manufacturing Weigh On Demand For Euro?

The euro failed to fully capitalise on the pound’s weakness in the previous week amid lingering concerns over the health of the eurozone economy. Confidence data across the region was less than inspiring.

This week the euro could come under further pressure as investors turn their attention to more economic data from the bloc. Should manufacturing PMI’s show that the eurozone manufacturing sector is showing fresh signs of slowing, demand for the common currency could be hit. The manufacturing sector was in contraction in February, a deepening of this contraction could mean the European Central Bank will be even less likely to consider raising interest rates any time soon.

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.

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 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.