GBP/EUR: Pound Drops Versus Euro As Honda Announces Exit From UK

The pound rallied close to 3% versus the euro across Thursday and Friday of last week on renewed hopes of a Brexit deal. The pair reached a five-month high of €1.1504. The pound is losing ground in early trade on Monday

Analysts are expecting the pound to have a particularly volatile week this week. However, this is unlikely to come as a huge surprise given the Brexit timeline and events. Boris Johnson will attend the EU summit 16th — 17th in a bid to secure a Brexit deal with EU leaders before the U.K. is due to leave the EU on 31st October.

Last week the pound rallied into the weekend after U.K. prime minister Boris Johnson met with his Irish counterpart Leo Varadkar and the two saw a pathway to a Brexit deal. Further talks between EU chief negotiator Michel Barnier and U.K. Brexit secretary also went well leaving pound investors the most optimistic that they have been for months over the possibility of the U.K. leaving the EU with a deal. However, weekend talks have failed to result in an accord.

Intense Brexit talks are set to continue at the start of the week as the EU and UK look to develop the alternative to the deeply contended Irish backstop. Failure to agree the deal could see Boris Johnson requesting an extension to Brexit as he is legally required to do. Prior to the EU summit today the Queen will officially open a new session of Parliament. Boris Johnson’s policies will come under close scrutiny.

Euro In Favour Following US — China Trade Deal 

The euro was broadly in favour across the previous week, albeit less so that the pound. The euro advanced despite German recession fears growing following a week off poor data. The common currency was pushed higher by a broad risk on sentiment as investors cheered Brexit developments and the beginning of the 13th round of US — China trade talks. A phase 1 trade deal was agreed between US and China late on Friday. Investors shrugged off the soft data because progress in Brexit and the ongoing trade dispute could reverse any euro wide economic slowdown.

This week investors will be watching for any further updates regarding US — China trade, as well as any update on the US — EU regulatory trade tariffs. Today eurozone industrial production could boost the euro. Analysts expecting a 0.3% month on month increase in August.


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.

Why does strong economic data boost a country’s currency?
Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.
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.


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