The pound rallied against the euro at the start of the new week. Brexit progress is supporting the pound, whilst dollar strength is weighing on the euro. The pound euro exchange rate is trading 0.2% higher in early trade on Monday at €1.1722. Although trading is expected to be fairly muted as the UK remains closed for a bank holiday.
|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 pound pushed higher versus the euro as the new week kicks off, extending gains from the previous week. On Friday, the pound closed 0.8% higher versus the common currency. Brexit talks remain the central focus for pound traders. Cross party talks are reportedly progressing well. Headlines indicate that UK Prime Minister Theresa May has agreed to draft in new clauses to the Brexit deal which would provide for a customs union style arrangement. This would guarantee that there are no checks on goods crossing the EU — UK border.
This is a move by Theresa May to attempt to meet opposition leader Jeremy Corbyn’s key demand to protect trade. It is unclear whether this will be enough to get the opposition party to support Theresa May’s Brexit deal and push it through Parliament. There is also the risk that Theresa May’s pro-Brexit cabinet ministers could resign when they return to work on Tuesday following the long weekend.
A customs union style agreement would mean a softer Brexit, which is more beneficial for the pound.
|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 euro was trading on the back foot at the start of the new week, courtesy of dollar strength. The euro trades inversely to the dollar. When the dollar advances the euro slips lower.
The dollar was charging higher on Monday as investors looked towards the buck for its safe haven status. The dollar is the reserve currency of the world, so in times of increased geopolitical tension investors look towards the dollar for safety. President Trump tweeted on Sunday that he could increase tariffs on $200 billion dollars’ worth of Chinese imports to 25% from 10%. Trump is threatening to reignite the trade war with China and derail months of talks.
Today investors will look towards Eurozone retail sales data for clues over the health of the eurozone economy. Economists consider retail sales to be a future indication of inflation. Strong retail sales point to strong inflationary pressures. Should inflationary pressures pick up the European Central Bank could look more favourably towards hiking interest rates.
|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.|
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