GBP/EUR: Pound Gives Up Gains As Parliament Fails To Agree A Plan B

Strong UK manufacturing data and another attempt by Parliament to take control of Brexit sent the pound higher in the previous session. Meanwhile, the euro softened amid a slew of disappointing economic statistics. The pound euro exchange rate climbed to a high of €1.1730, before easing back towards the close.

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.

UK Parliament voted for a second time on Plan B for Brexit. Once again, the House of Commons failed to agree on a way forward for Brexit. None of the rival plans to Theresa May’s Brexit plan managed to win a majority. The closest to achieving a majority was a customs union, which lost 273 votes to 276.

With just 10 days until the UK is due to leave the EU, the stalemate in Parliament leaves Theresa May with a crucial decision over what to do next. She will bring her cabinet together for a meeting today which is due to last for hours. Some reports suggest that she might bring her deal back for a fourth attempt prior to April 10th. Failure to get her deal through wil mean that she must decide between several unfavourable options. These include a no deal Brexit, a long extension, a general election or a second referendum. Any of these options will provoke resignations from within her cabinet.

The continued uncertainty pulled the pound off an earlier high. All eyes will be on the cabinet meeting today.

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.

Weakness in Manufacturing Sends Euro Lower

The euro was out of favour in the previous session. Manufacturing data from across the bloc showed that contraction in the sector deepened not only in all major eurozone economies but also across the bloc as a whole. Manufacturing activity in Germany, which was also heavily in contraction, actually worsened in March. France and Italy were in a similar position. The eurozone manufacturing sector has been hit as slowing global growth and Brexit hit foreign demand.

Adding to weakness in the euro was soft inflation data. Figures showing that inflation continued to tick lower in March, means that the European Central Bank is unlikely to consider raising interest rates anytime 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.

Today, the only data from the eurozone is the producer price index. This produces an indication of inflation at wholesale level. It can give an insight into future consumer inflations levels.

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.