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GBP/EUR: Pound Vulnerable Amid Continued Brexit Uncertainty

8th October 2019

Brexit concerns sent the pound lower on Monday. The pound euro exchange rate closed the previous session down 0.3% at €1.1200. The pair is holding steady in early trade on Tuesday.

The pound slipped lower in the previous session as no deal Brexit fears were once again on the rise. As Brexit negotiations resumed in Brussels, Prime Minister Boris Johnson received a boost from the courts. The Scottish courts ruled in favour of the PM, rejecting a demand that would have forced Boris Johnson to abide by the law to request an extension to Brexit if there is no Brexit deal agreed. Whilst this is good news for the Prime Minister, the pound sunk lower as investors reassess the probability of a no deal Brexit.

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.

Also weighing on the pound in the previous session was data that showed that that Brexit uncertainty was hitting consumer confidence and retailers hard. Data from British Consortium of Retail showed retail sales experienced the worst September since 1995. Delving deeper into the figures they show that non-essential items were worst hit as Brexit uncertainty is negatively impacting consumer’s willingness to spend, causing them to rein in their spending. This is bad news for the UK economy, which is so dependent on consumers.

With no high impacting data due for release today, the focus will remain firmly on Brexit developments.

Fiscal Spending Optimism Lifted Euro

The euro was broadly in favour in the previous session despite more dismal data from the bloc’s largest economy. German factory orders declined for a 15^th straight month, dropping -6.7% year on year, amid the ongoing US – Sino trade dispute and slowing global demand. Eurozone investor sentiment also dropped to the lowest level in six years. Investors are growing increasingly nervous that Germany is tipping into recession and that the slowing momentum will hit the rest of the bloc.

The ECB have already eased monetary policy last month. Investors had believed that they would cut rates further. However, there is a growing voice not just from the ECB but also the European Commission that the eurozone needs fiscal stimulus from cash rich countries such as Germany and Norway to shore up the bloc’s economy. Higher spending by the government has an inflationary effect. As a result, the euro edged higher.

Today euro investors will look to German industrial production figures for further insight into the health of the German economy.

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.