The pound sunk to 5 month lows versus the euro on Monday. Brexit anxiety combined with a weaker dollar sent the pound euro exchange rate to a low of €1.1178.
|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 drifted southwards in the previous session as investors continued to digest the televised Tory candidate debate and as they looked ahead to the second round of voting this evening. Bookies favourite, Boris Johnson, was a no show at the debate giving the other 5 remaining candidates the opportunity to put their case forward. Rory Stewart came out of the debate as a clear winner, his popularity increasing and the bookies pushing him into second place ahead of Jeremy Hunt.
Even so Boris Johnson, who supports Brexit with or without a deal, is still the clear favourite. Today, Conservative ministers will vote again in the second round. Each candidate must receive a minimum of 33 votes in order to remain in the contest, to become leader of the Conservatives and UK Prime Minister. Boris Johnson is comfortably over this number with 114. Rory Steward was only at 19 votes in the first round.
With Boris Johnson set to win, the probability of a no deal Brexit has increased. Economists have frequently talked of the damage that a no deal Brexit would do to the UK economy and therefore the pound. For this reason, the pound remains under pressure. Should Boris Johnson have another clear win today the pound could remain depressed.
|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 started the first day of the week on the front foot. This was mainly thanks to a weaker dollar rather than any notable euro strength. The euro trades inversely to the dollar. Dollar traders are looking towards the Federal Reserve monetary policy meeting on Wednesday. Market participants are expecting a more cautious Fed, which is dragging the dollar lower and boosting the euro.
The European Central Bank Economic forum started on Monday. The president of the European Central Bank (ECB), Draghi, will be giving a 30 minute speech. Whilst no formal policy will be set by the ECB, investors will be watching closely for commentary providing clues as to the next move by the ECB.
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Inc., Currency Live or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. Consult our risk warning page for more details.
This article was initially published on TransferWise.com from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.