GBP/EUR: Brexit Extension & EU Trade Tariffs In Focus

Brexit uncertainty pulled the pound lower across most of Monday. The pound only managed to stage a comeback when the House of Lords voted to stop a no deal Brexit. The pound—euro exchange rate tumbled to a low of €1.1566 before rebounding to close down at €1.1604. The pound was moving higher versus the euro in early trade on Tuesday.

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 Prime Minister Theresa May has been holding talks with the leader of the opposition Jeremy Corbyn in an attempt to find a way to get a Brexit deal through Parliament. However the search for a new Brexit compromise has not gone well and talks have stumbled. Theresa May’s team have made an offer of a compromise to Labour. However, it doesn’t cross any of the PM’s red lines and doesn’t meet any of Labour’s key demands. This dragged sterling lower.

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 House of Lords voting in favour of preventing a no deal Brexit picked the pound up off session lows. The bill now passed by the House of Commons and the House of Lords takes the pressure off the UK crashing out of the EU on 12th April. By law the UK will avoid the most damaging Brexit scenario for the economy.

Today Theresa May will meet with Germany’s Angela Merkel and France’s Macron as part of her efforts to secure a short delay to Brexit. At home she is fighting off growing unrest within her party.

Caution After Trump’s Attack on Europe

The euro traded broadly flat in the previous session. An improvement in the eurozone sentiment index helped support demand for the euro. However, investors are trading cautiously following President Trump’s threat of new trade tariffs on European helicopters, cheese and wine. The threat of tariffs on some $1 billion imports from the EU will only go ahead following a World Trade Organisation (WTO) review this summer. The announcement comes just as the EU and the US are to begin trade talks on the industrial tariffs that Trump was threatening last summer.

Any trade tensions with the EU could hit demand for the value of the euro, whilst boosting the value of the dollar.

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