Italian political fears and a rare moment of Brexit optimism sent the pound euro exchange rate higher on Tuesday. The pair rallied to a high of €1.0984. The pound euro rate is seen edging lower in early trade on Wednesday.
|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.
With no economic data to distract pound investors, Brexit was the central driving force for the pound in the previous session. Prime Minister Boris Johnson will dash to see Germany’s Angela Merkel and French President Macron to demand an alternative to the Irish backstop. Angela Merkel has said that practical solutions are needed on the Irish backstop. This has been the most optimistic response that Boris Johnson has received, which lifted the pound.
However, the possibility of a renegotiation of the Withdraw Agreement is slim and European Council President Donald Tusk rejected Johnson’s demands to scrap the Irish backstop, saying that the UK lacks realistic alternatives.
As UK no deal Brexit preparations step up, pound investors could grow increasingly nervous. Boris Johnson’s threat to scale back EU contact in 10 days to focus on no deal preparations could weigh on demand for the pound as a disorderly Brexit becomes more likely.
|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.|
Italian Politics In Focus After PM Resigns
The euro was under pressure in the previous session as Italian political risk dominated. Italian Prime Minister Guiseppe Conte resigned, blaming League leader Matteo Salvini for the collapse of the coalition. The move by Conte has deepened the country’s political crisis after months of in government squabbling.
A period of consultation will now take place for Italy’s President to decide if there is potential for a new coalition or whether the country will have to go to the polls again. This could mean an autumn election which would be particularly problematic as it would interrupt negotiations between Italy and the EU over the annual budget.
Whilst the League was the junior party in the coalition, its leader Matteo Salvini has grown in popularity, eclipsing 5 Star’s Luigi Di Maio. The concern for the euro is that Salvini is very much infavour of “courageous fiscal policy”, which will almost certainly go against EU rules. Euro traders are envisaging problems come October when negotiations take place.
There is no high impacting economic data today. Investors will continue digesting Italian political developments whilst also looking ahead to Thursday’s pmi data.