GBP/EUR: Brexit Hopes Lift Pound vs Euro

The UK Supreme Court ruing that Boris Johnson’s prorogation of Parliament was illegal sent the pound higher versus the euro in the previous session. The pound euro exchange rate surged to a peak of €1.1360 before easing back into the close. The pound is advancing against the euro in early trade on Wednesday.

Eleven judges in the UK’s highest court ruled, on Tuesday, that Boris Johnson acted unlawfully by suspending Parliament for five weeks so close to Brexit. The court decided that it was unlawful “because it had the effect of frustrating or preventing the ability of Parliament to carry out its constitutional functions” without adequate justification.

Parliament will reconvene today which has provided a dose of optimism to pound investors, despite the lingering political uncertainty. Boris Johnson has given no indication that he will resign, even though his Brexit strategy lays in tatters. The pound rose because investors determined that with MP’s returning to work, there is a smaller probability that the UK will crash out of the EU without a deal.

However, it is worth pointing out that this decision by Parliament has weakened the PM’s negotiating strategy with the EU. He is now in a much weaker position which could make a Brexit deal less likely. Investors will pay close attention as to what the PM’s next move will be.

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 Trades At The Will Of The Dollar

The euro moved higher later in the session on Tuesday. However, this was more of the dollar weakness story rather than because of any fundamental strength to the euro.

The euro trades inversely to the dollar. The dollar slumped in the previous session following a sharp decline in US consumer confidence and after US House speak Nancy Pelosi accused President Trump of enlisting a foreign power to help win the 2020 election. The House will launch formal impeachment investigation into President Trump. The high levels of political risk sent the dollar lower, boosting the euro.

However, dollar the dollar has quickly rebounded after President Trump criticised China in a United Nations speech. This sparked concerns about worsening trade relations between the two powers and triggered a fresh wave of risk aversion. In times of geopolitical risk investors look towards the dollar for its safe haven properties. As a result, the euro is under pressure.

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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