Despite rallying to an 11-week high of €1.1256 post ECB announcement, the pound euro exchange rate quickly dropped lower. The pair slipped into the red closing 0.4% lower at €1.1150. The pound is advancing 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. |
Comments from Chief EU Negotiator Michel Barnier that Brussels was still waiting from comprehensive proposals from Boris Johnson and his government on how to avoid a hard border in Ireland weighed on the pound in the previous session. Barnier warned that with no concrete proposals a no deal Brexit remains a very real possibility.
However, this morning this pound is advancing amid hopes of a breakthrough in the current Brexit impasse. The DUP, the northern Irish party which props up the UK government said, last night, that they could be prepared to shift their red lines over the Irish border. This opens the possibility to a new Brexit deal being reached, boosting 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. |
Euro Volatility After ECB Announce Stimulus Measures
In the previous session European Central Bank President Mario Draghi announced the biggest package of rate cuts and stimulus measures in three years. The central bank kept its main lending rate at 0%. However, it cut the overnight deposit rate by 0.1% to -0.5%. This means that it charges banks more for keeping deposits with the ECB. The aim is to get money out of the banks and to consumers, through lending.
The ECB also announced that it will restart its quantitative easing programme. The central bank will start buying up debt at a rate of €20 billion euros per month, indefinitely. Under the prospect of lower rates and fresh monetary stimulus measures the euro fell.
However, it quickly recovered. One of the main reasons for this is because the ECB is upping pressure on individual countries to boost their economies through fiscal spending. This has an inflationary effect. Christine Lagarde, the incoming ECB President is very politically rooted and could have a greater influence over Germany and other countries than Draghi has had so far.
Today investors will continue digesting the ECB announcement. Trade numbers from the eurozone could also drive the euro.
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