GBP/EUR: Will Brexit Vote Politics Lower Pound vs Euro?

Hopes of a Brexit deal boosted the pound on Thursday. The pound euro exchange rate rallied to a high of €1.1325 as the pair gained over 1.4% across the session. The pound is advancing in early trade on Friday.

The pound rallied hard in the previous session after UK Prime Minister Boris Johnson and his Irish counterpart Leo Varadkar said that they saw a pathway to a deal on Brexit, after unexpectedly upbeat private talks. Following the meeting the Irish Prime Minister sounded surprisingly positive saying that the now believed that a new deal could be achieved by the end of October.

Britain has reportedly proposed a pared down free trade agreement (FTA) to end the Brexit stalemate and get a deal done by the 31st October deadline. An FTA would likely remove all tariffs on goods crossing between the EU and UK and could go some way to resolving the contentious issue of the Irish border.

Talks between the EU and the UK will resume today. The positive reaction by Ireland’s Prime Minister is seen as crucial in persuading other EU leaders to support the deal. Investors will continue watching developments very closely.  Any sign that the two sides appear to be at least avoiding a hard, no deal Brexit could send the pound higher.

 

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.

 

German Inflation Holds Steady At A Weak 0.9%

The euro was broadly in favour across the previous session, albeit less so than the pound. The euro moved higher versus most of its peers as investors digested weak German export figures and the minutes from the September European Central Bank (ECB) minutes.

Whilst German exports shrunk by almost double what analysts had been forecasting, the minutes from the ECB meeting were supportive of the euro. The minutes revealed that ECB decided to go ahead with restarting its bond buying programme despite objections of its own officials. This information highlights the division within the ECB over its dovish stance. Investors are hopeful that incoming President Christine Lagarde will be pressurised to adopt a less dovish position.

Today German inflation had little impact on the euro after printing in-line with analysts forecasts at 0.9%. This is significantly below the ECB’s 2%. Investors will now look ahead to a speech by ECB President Draghi.

 

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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