Brexit fears sent the pound tumbling lower on Monday, although a weak euro capped losses. The pound euro exchange rate dipped to a low of €1.0978, its weakest level since last Wednesday. The pair was holding steady in early trade on Tuesday.
| 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. |
Sterling declined across the board in the previous session after UK manufacturers reported the weakest output in 7 years. The manufacturing pmi dropped to 47.4, down from 48 in July. This is the latest sign that concerns over a no deal Brexit and the slowing global economy are hitting order levels across the country.
The PMI report, which is closely watched by market participants and the Treasury alike, found that EU — based customers were shunning British manufacturers and rerouting supply chains away from the UK as concerns grow over a disorderly Brexit. Meanwhile orders from US and Asia have declined as the world economy has slowed. This is a sign of the tough climate within which the UK will need to strike new trade deals outside of the economic block.
| 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. |
As signs grow that a no deal Brexit will have a negative impact on the UK economy, UK Prime Minister, Boris Johnson, also drove the message home that he would not delay Brexit under any circumstances, in a warning shot to rebel MP’s. Johnson also threatened a General Election on 14th October should he lose a crucial vote over a no deal Brexit in Parliament.
Today, in addition to Brexit headlines, pound investors will also look to UK construction pmi data to assess the health of the construction sector of the economy.
Euro Investors Await Christine Lagarde’s Speech
The euro was broadly out of favour in the previous session as German manufacturing data unnerved investors. The export dependant manufacturing sector remained deeply in contraction in August as weaker demand saw companies scaling back production and cutting jobs. Activity in the German manufacturing sector, which accounts for about 20% of the economy languished at 43.5, whereby 50 separates expansion from contraction. Adding to the sectors’ woes, sentiment for future output fell to a record low.
The weak data comes following a fall in inflation and a rise in unemployment, pointing to a slowdown in the German economy raising fears of a recession.
Today there is no high impacting data. Investors will look to a speech by Christine Lagarde, who will takeover as ECB President in October. Signs that she will continue will Draghi’s dovish approach could keep pressure on 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. |
