GBP/EUR: Brexit Dominates Undermining The Pound

With UK markets closed for a public holiday there was very little supporting the pound, whilst Brexit concerns weighed. On the other side of the equation, the euro was well supported by encouraging eurozone economic data. The pound slipped lower versus the stronger euro, hitting a nadir of €1.1686. This is almost 100 points lower than the high of €1.1776 reached on Friday.

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.

Brexit took centre stage on Monday, which was a bank holiday for the UK. Reports of progress in cross party Brexit talks had been offering the pound support at the end of last week. Reports that UK Prime Minister Theresa May could compromise over a customs union in order to gain Labour’s support for a Brexit deal had sent the pound higher. However, on Monday rumours circulated that up to 100 UK Conservatives could block the compromise with Labour, preventing a softer version of 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.

Today there is no high impacting data. Brexit will remain the focus for pound investors. They could also look towards Halifax house price index and new car registration for clues as to the health of the UK economy amid Brexit uncertainty.

Will Germany Factory Orders Support The Euro?

The euro moved higher versus the pound in the previous session, supported by a slew of supportive data. The euro has generally been unappealing as investors have been concerned over how the global economic slowdown is impacting economic activity in the eurozone.

However, Monday’s data was encouraging. The German service sector made a strong start to the second quarter. The German service pmi inched higher to 55.7 in April, up from 55.6 in March. Whilst the manufacturing sector in German continues to contract, the service sector is making up for the shortfall and supporting the German economy. The strong data lifted the euro.

Today investors will look towards German factory orders for further insight as to how Europe’s largest economy is holding up. The manufacturing sector is suffering under the strain of the slowing global economy. Factory orders have been notably weak in previous months. Analysts are predicting that factory orders could show some signs of recovery in March, increasing 1.5% month on month. Improving data could help boost the euro.

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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