GBP/EUR: UK Politics & German Sentiment Data To Drive Movement

The pound fell versus the euro for the seventh straight week last week. The pair dropped to a 5-month low of €1.1143 as Brexit fears and concerns over the health of the UK economy overshadowed a more cautious European Central Bank. The pound was slipping marginally lower versus the euro in early trade on Monday.

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.

Demand for the pound dampened in the previous week as the probability of a no deal Brexit increased. Boris Johnson, hard-line Brexiteer and favourite to win the UK conservative party leadership battle won his place in the final leg of the race with Jeremy Hunt.

Boris Johnson achieved 160 votes to Jeremy Hunt’s 77. Boris Johnson has made no secret of his desire to remove the UK from the EU on 31st October, with or without a Brexit deal. This is something business leaders and economists have frequently warned against. The results of the final stage of voting will be announced on 22nd July. The pound could struggle to make any meaningful move higher with the prospect of a no deal Brexit lingering.

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.

Bank of England (BoE) Governor Mark Carney also hit demand for the pound after downwardly revising the economic growth outlook for the UK. The BoE Chief sees growth of 0% in the second quarter, down from 0.2%. He cited Brexit and a slowing global economy as the principal headwinds.

There is little economic data for pound traders to digest this week. UK consumer confidence on Thursday could grab the most attention. Today investors will be watching closely for any clarification from Boris Johnson over the home argument which the police were called to.

Will IFO German Sentiment Data Pull Euro Lower?

The euro was out of favour early last week as the European Central Bank (ECB) President Mario Draghi said that the ECB stood ready to loosen monetary policy should the eurozone economy need the support. However, a weaker dollar across the week and an improvement in eurozone pmi figures by the end of the week helped lift the common currency.

Today the euro could come under increased pressure as investors look towards IFO German sentiment survey. Analysts are expecting another shift lower in business confidence in Europe’s largest economy. Should this be the case the euro could slip, giving up some of its gains from the previous week.

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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