The pound was evenly matched versus the euro in the previous session. The pound euro exchange rate ended the day at €1.1710 on Wednesday, approximately the same level that it started.
|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.
Hopes of a softer version of Brexit supported the pound in the previous session. UK Prime Minister Theresa May met with the leader of the opposition party Jeremy Corbyn in an attempt to break the deadlock in Westminster. According to Jeremy Corbyn the talks went well. Investors are optimistic that talks between the two leaders will result in a softer, more palatable version of Brexit. This would be a more favourable version for UK businesses, the UK economy and therefore the pound.
UK Parliament also pushed into law the avoidance of a no deal Brexit. Theresa May will be forced to request an extension to Article 50 from the EU, should talks with Jeremy Corbyn fail. The pound found support in the prospect 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.
Whilst Brexit news supported the pound, UK economic data weighed on demand for sterling. Data showed that activity in the UK service sector unexpectedly contracted in March. The service sector PMI declined to 48.9, down from 51.3 in February, hit by Brexit uncertainty. The service sector is the dominant sector in the UK economy, accounting for 80% of economic activity in Britain. The weak data fuelled fears of a sudden downturn in the UK economy. The weak data offset Brexit optimism.
Today there is no economic data for pound traders. Brexit will remain front and central to movement in the pound. Any signs of an agreement between Jeremy Corbyn and Theresa May could help lift the pound.
The euro was also in demand in the previous session after data from the eurozone unexpectedly impressed. Service sector PMI data from Italy and Germany gave investors something to cheer. Data from the eurozone’s largest and third largest economies showed that activity in the service sector was strong. A relief given the very weak manufacturing figures released from these same countries’ days earlier.
Today investors will turn their attention to the minutes from the latest European Central Bank (ECB) meeting. The ECB have been particularly cautious in recent meetings as data from the eurozone has been pointing to a slowing of economic growth. A more dovish rhetoric could send the euro lower.
|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 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.