Fears that the chance of a Brexit deal are as good as dead sent the pound on a downward trajectory in the previous session. The pound dropped to a nadir of €1.1111, its lowest level in a month. The pound euro exchange rate closed the session at €1.1150 and is losing ground in early trade on Wednesday.
The pound fell in the previous session on reports that Brexit talks are on the verge of breaking down. On a phone call, German Chancellor Angela Merkel advised UK Prime Minister Boris Johnson that a Brexit deal is now “overwhelmingly unlikely”. Boris Johnson’s final Brexit plan had received a lukewarm reception from EU leaders and this week was being seen as the final week for the two sides to agree on a deal ahead of the UK’s departure from the EU. Given the latest update a deal looks doubtful.
As the EU and the UK clashed, the government was also stepping up no deal Brexit planning. The British government published a 156-page report on what the country is doing and what businesses and citizens should be doing to prepare for a disorderly exit. The prospect of a disorderly, hard Brexit unnerved pound traders.
| 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. |
Investors will continue to watch Brexit updates closely. The PM announced a visit to Dublin to hold talks with Irish PM Leo Varadkar in a last-ditch attempt to hammer out a deal.
Euro Steady On Data Quiet Day
The euro strengthened in the previous session following better than forecast German industrial production figures. After a barrage of gloomy stats from Germany recently, numbers which suggested that the German economic slowdown might not be as severe as first though helped inject some life into the euro. Whilst an unexpected tick higher in industrial production boosted morale, recession fears still linger.
Investors are increasingly convinced that the EU’s largest economy is heading for a recession. Slowing momentum could quickly spill across the other eurozone economies. The European Central Bank eased monetary policy by cutting interest rates and restarting their bond buying programme last month in an attempt to boost lacklustre inflation and shore up the economy.
| 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. |
There is no high impacting eurozone data today. Instead investors will look ahead to German inflation figures to be released 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. |
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