GBP/EUR rate driven by Brexit talks and release of PMIs

The pound climbed against the euro across the previous week. The pound euro exchange rate rallied to a 6-month peak of €1.1381 on Friday, before slipping. The pair closed 0.1% lower on Friday, although still up 0.3% across the week, its sixth consecutive week of gains. The pound is moving lower versus the euro in early trade on Monday.

The pound has advanced over the past six weeks as investors have reacted to Brexit developments and reassessed the prospects of a no deal Brexit. This week the direction of Brexit could take another turn if the U.K. Supreme Court rules that Prime a Minister Boris Johnson acted illegally when he suspended Parliament for such an unusually long period of time just prior to the Brexit date of 31st October. However, should the UK’s top court rule in the PM’s favour, then ministers will have precious little time to prevent the UK leaving the E.U. in a disorderly fashion.

This week Boris Johnson will meet with various E.U. officials. Daily Brexit talks are also on the agenda as the government continues its push to find a Brexit deal. Last week optimistic comments from European Commission President Jean-Claude Juncker, that a deal can be reached, boosted the pound to a six-month high. This was followed by more pessimistic comments from the Irish Prime Minister which dragged the pound lower. These movements prove just how sensitive the pound is to Brexit headlines.

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.


Eurozone & German PMI’s In Focus As German Recession Concerns Rise?

The euro moved lower versus the pound across the previous week. The euro was under pressure after the European Central Bank (ECB) loosened monetary policy earlier in the month. The ECB restarted its bond buying programme and cut overnight deposit rates in an attempt to get more money moving around the financial system. This has weighed on the value of the euro lower.

Today eurozone PMI data is in focus. Last month’s pmi figures ticked higher in both the eurozone area and Germany. However, the data showed that the service sector continues to shield the depressed manufacturing sector. Analysts are expecting today’s data to show manufacturing activity increased, whilst service sector activity declined. Weak readings could drag the euro lower.


Why does poor economic data drag on a country’s currency?
Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.


Later today ECB President Mario Draghi will make an appearance at the European Parliament. Investors will be watching for any signs on monetary policy going forward.


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.


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