The pound retreated from highs versus the euro on news that Boris Johnson convincingly won the first ballot for Tory leader. The pound euro exchange rate hit a high of €1.1264, before easing back to close flat at €1.1241.
|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.
For example, it could be written: 1 GBP = 1.13990 EUR
Here, £1 is equivalent to approximately €1.14. This specifically measures the pound’s worth against the euro. 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 GBP
In 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.
Pro-Brexit Boris Johnson won the first round of votes by a significant margin. The ex-foreign minister won the backing of 114 Conservative MP’s. Jeremy Hunt was in second place with just 43 votes. Three candidates were eliminated from the leadership battle for failing to secure the minimum 16 votes required to continue. They were Ester McVey, Mark Harper and Andrea Leadsom.
Given that Boris Johnson was the favourite in the polls, yesterday’s results have not come as a big surprise to pound traders. Boris Johnson has said that he will lead to the UK to Brexit with or without a deal. This had unnerved investors as fears of a no deal Brexit return. However, most recently Boris Johnson had toned down his enthusiasm for a no deal Brexit which offered some support to the pound.
Today there is no high impacting UK economic data due to be released. Bank of England Governor Mark Carney will give a speech in London. This could attract investor attention, particularly as the probability of a no deal Brexit has increased.
|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 traded lower versus its peers on Thursday amid mounting evidence that the US — Sino trade dispute is negatively impacting the eurozone economy. Eurozone industrial production declined -0.5% month on month in April. This was as analysts had expected. However, the reading for March was revised lower on both a monthly and annual basis.
The weak data comes just a day after European Central Bank President Mario Draghi and IMF President Christine Lagarde warned on the negative impacts of the ongoing US — Sino trade dispute on Europe. Whilst the ECB had sounded less cautious than investors had expected in their last meeting, concerns are growing that Europe could be heading for a downturn.
Today there is no new high impacting eurozone data for investors to digest. As a result, the euro could have a relatively quiet day.
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