GBP/EUR: Euro Lower As Investors Look Ahead to Thursday's ECB Meeting

The pound euro exchange rate sold off at the start of the previous week, only to rebound across the latter part of the week. The pair hit a low of €1.1045 midweek before recovering to close on Friday at €1.1152. Both the pound and the euro have been under pressure owing to a gloomy outlook. The pound was moving higher versus the euro at the start of the week.

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.

No deal Brexit fears dominated the start of the previous week. As fears intensified, the pound was dragged to its lowest levels of the year. The pound was able to recover thanks to better than forecast UK retail sales and political developments surrounding Brexit. The House of Commons moved to prevent the next Prime Minister suspending Parliament to push Brexit through. Ultimately this means that it will be harder for the winner of the Conservative leadership battle to drive a no deal Brexit through. Front runner, Boris Johnson has refused to rule out suspending Parliament to achieve Brexit.

The UK economic calendar is quieter this week than last. However, this focus will be squarely on UK politics, as the Conservative leadership battle is expected to reach its conclusion. If Brexiteer and front runner Boris Johnson wins then processes will begin for him to take over from Theresa May. Any fresh rhetoric from Boris Johnson surrounding Brexit could hit 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.

Political uncertainty in Italy, Europe’s 4th largest economy, weighed on the euro towards the end of last week. Warnings emerged that Italy’s coalition government could soon collapse amid souring relations between 5 Star and the League.

This week attention will be firmly on the eurozone economic calendar which is packed with high impacting events which could impact the outlook for the euro. In addition to macro data being published Tuesday through Friday, the European Central Bank will also be making its monetary policy decision on Thursday. Analysts are expecting this to be the biggest event of the week for the euro depending on the tone that the central bank takes. Analysts are expecting a more dovish stance regarding the eurozone economic outlook and monetary policy. This could weigh on demand for the euro.

Why do interest rate cuts drag on 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. Lower interest rate environments tend to offer lower yields. So, if the interest rate or at least the interest rate expectation of a country is relatively lower compared to another, then foreign investors look to pull their capital out and invest elsewhere. Large corporations and investors sell out of local currency to invest elsewhere. More local currency is available as the demand of that currency declines, dragging the value lower.

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