Will Theresa May Agree To A Customs Union To Get Her Brexit Deal Through Parliament?

Brexit has been extended but that didn’t prevent the pound from drifting lower versus the euro on Thursday. The pound euro exchange rate hit a high of €1.1622, before moving lower into 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.

The UK avoided crashing out of the EU without a deal. However, the pound remains subdued as investors wait cautiously to see how the next chapter starts. The UK has been granted an extension to Article 50 until 31st October with the possibility to leave earlier. However, in order to do so Prime Minister Theresa May will need to get her Brexit deal through Parliament. Up to now, this has proved impossible.

Reports that Theresa May could soften her stance in talks with the leader of the opposition, is offering some support to the pound. Theresa May claimed that there wasn’t much difference between her trade proposals and those of Jeremy Corbyn’s. Her remarks suggest that she could consider remaining in the customs union. Should the PM and Jeremy Corbyn managed to agree a Brexit deal then the UK could still be on track to leave the EU with a deal next month.

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.

There is no high impacting UK data due for release today. This means that investors will continue to trade Brexit headlines.

EU Backs Trade Talks With US

The euro was broadly in favour on Thursday. Data from Germany showed that inflation remained steady at 1.3% year on year and 0.4% on a monthly basis. These figures were in line with what analysts had been expecting.

The euro received a boost from reports that the EU was boosting efforts to avert a trade war with the US. European governments are due to back trade talks with the US to avoid costly and damaging trade tariffs. The move comes after US President Trump started ratcheting up pressure on the EU earlier this week. A trade war with Europe would be very damaging to the already fragile economy. Any signs that it could be avoided could boost the euro.

Today eurozone industrial production figures will be under the spotlight. Analysts predict that industrial production will contract again in February amid slowing global demand. A weak reading could pull the euro lower.

Why does poor economic data drag on a country’s currency?
Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.

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