The pound extended gains for a third straight session versus the euro on Thursday. The pound euro exchange rate hit a 6-week high at €1.1183 before closing 0.6% higher at €1.1169. The pair is seen giving back some of those gains in early trade on Friday.
|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.
The pound pushed higher in the previous session as investors continued to react to Parliament tearing up Prime Minister Boris Johnson’s Brexit strategy and denying him a snap general election. The pound is on track for its largest weekly gain since May after MP’s voted to force Boris Johnson to delay Brexit by three months. The possibility of an election still exists; however the opposition party are looking for the bill preventing a no deal Brexit being turned into law before agreeing to an election.
Analysts predict that the most likely outcome is that Brexit will be delayed until 31st January and an election will take place after the initial October 31st deadline but before the new January deadline. A delay of both Brexit and an election lifted the pound higher. This is because a no deal Brexit and political risk have been pushed back.
|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.|
Today the focus will remain squarely on Westminster and developments surrounding Brexit and Boris Johnson’s position.
Will EU GDP Drag Euro Lower?
The euro slipped lower versus the pound in the previous session as investors reacted to disappointing German factory data. Factory orders dropped by -2.7% month on month in July. This was significantly worse than the -1.1% decline that analysts had forecast. The data showed that Europe’s largest economy continues to be negatively affected by slowing global trade as the US — Sino trade dispute continues.
The European Central Bank will meet next week to make its monetary policy announcement. Analysts and market participants have been expecting a rate cut or a form of policy loosening.
Today is a busy day for economic releases. Investors will be looking at German industrial production and Eurozone GDP for clues as to the health of the eurozone economy and to help gauge the next steps of the ECB.
|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.|