The pound edged steadily lower versus the euro on Wednesday. The pound euro exchange rate dipped to a nadir of €1.1259 before clawing back some ground to close at €1.1286. The pair is holding steady in early trade on Thursday.
Sterling slipped across the board on Wednesday, despite the House of Commons reopening following the Supreme Court’s ruling that the PM’s proroguing of Parliament was unlawful. Prime Minister Boris Johnson is facing the biggest crisis of his political career. He made offers for opposition parties to trigger a formal vote of no confidence in his government. This could put the UK on course to a general election with just 5 weeks to go until Brexit.
Opposition leaders are keen to avoid a vote of no confidence, for the time being, as Boris Johnson could opt to hold the general election after the 31st October. Under this scenario the UK would still be in danger of leaving the UK without a deal.
Whilst Cabinet minister Michael Gove said that there has been progress in Brexit talks, the European Union have said that British proposals are unsatisfactory. With the clock ticking and political uncertainty on the rise, the UK appears to be no closer to resolving Brexit.
|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.|
With no high impact UK economic data, Brexit will remain the central focus. Investors could also look towards Bank of England Governor Mark Carney as he gives a speech in Frankfurt.
All Eyes To ECB’s Draghi
The euro was also out of favour in the previous session, just less so than the pound. There was no eurozone economic data on Wednesday, instead the euro responded to US political headlines. The euro trades inversely to the dollar. Therefore, as the dollar moved higher amid swirling impeachment headlines and trade deal optimism the euro came under increased pressure.
Looking ahead euro traders will focus on a speech by European Central Bank (ECB) President Mario Draghi. He will be speaking at the European Systemic Risk Board annual conference in Frankfurt today. Investors will be listening carefully to see whether Draghi will defend the central bank’s recent decision to ease monetary policy in the eurozone. The ECB cut the overnight interest rate and restarted the ECB bond buying programme in an attempt to get more money washing around the financial system. If Draghi remains downbeat on economic conditions, he could drag the euro lower.
|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.|
|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.