The pound trended lower versus the euro across the previous week. The pound euro exchange rate dropped 0.8% to close on Friday at €1.1233, snapping a six-week winning streak. The pair is edging higher in early trade on Monday.
The pound drifted lower across the week that the UK Supreme Court ruled that Prime Minister Boris Johnson unlawfully suspended Parliament. By mid-week ministers had returned to Westminster. However, the pound came under pressure as uncertainty grew over the domestic political situation in the UK and as fears of a no deal Brexit returned with vigour. Sterling was gripped with Brexit pessimism after EU chief negotiator Michel Barnier said that the UK had failed to present “legal and operational” alternatives to break the current impasse.
| 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. |
The mood towards the pound soured further at the end of the week when Bank of England policy maker Michael Saunders hinted that the central bank was considering cutting interest rates as its next move, even in the case that the U.K. avoids a no deal Brexit.
The pound could come under pressure today as investors look towards the UK GDP data. Analysts are expecting the British economy grew at 1.2% in the second quarter. A weak reading one month prior to Brexit could unnerve pound investors.
German Inflation Data In Focus
The euro was broadly out of favour in the previous week, albeit less so that the pound, as investors continued digesting the move by the European Central Bank to ease monetary policy. Earlier in the month the ECB announced that it was restarting the bond buying programme and cutting the overnight deposit rate.
Following the move to ease monetary policy German policy maker Sabine Lautenschlager resigned from the central bank highlighting the division over policy and policy outlook. Furthermore, Sabine Lautenschlager was one of the more hawkish members of the ECB. Her resignation could change the hawk/dove balance which has also put downward pressure on the euro.
Data across the previous week, particularly the pmi readings painted a gloomy picture of the economic outlook in the eurozone and in Germany.
Today investors will look ahead to German inflation. Any sign of weakening inflation could prompt investors to assume that the ECB could ease monetary policy further.
| 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. |
