UK Prime Minister Theresa May’s call for cross party Brexit talks sent the pound surging higher on Tuesday. The pound euro exchange rate advanced to a peak of €1.1739, up from a low of €1.1617 earlier in the session.
|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 a bid to break the Brexit deadlock in Westminster, and to ensure that the UK leaves the EU with a deal, Theresa May has called for cross party talks with the leader of the opposition party Jeremy Corbyn. This approach is more likely to result in a softer version of Brexit, possibly keeping the UK within the EU customs union. Whilst this would mean Theresa May is crossing one of her red lines, it would be very good for UK businesses. As a result, the pound rose.
|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.
Jeremy Corbyn has already responded that he is happy to meet Theresa May to talk. The initial response from the EU has also been positive. Theresa May will now need to request an extension to the 12th April deadline, to prevent the UK leaving the EU without a deal in 9 days time. The PM should alsop brace herself for resignations in the coming days from the Brexiteers in her cabinet.
Investors will probably also take a second to glance at the UK service sector data, today. Analysts forecast that the dominant UK service sector slowed again in March as Brexit uncertainties continue to depress the UK economy.
The euro was broadly weaker in the previous session as investors look ahead to a raft of data from the region today. Following weak manufacturing figures from across the bloc earlier in the week, demand for the euro has been soft. The region can’t shake off concerns over slowing economic growth in Europe. This is leading investors to believe that he European Central Bank (ECB) are more likely to start tilting towards reducing interest rates rather than increasing them 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.
Today, investors will be watching retail sales data from the region. Analysts are expecting retail sales growth to slow to 0.1% on a month on month basis in February, down from 1.3%. A weak reading could pull the euro lower.
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