Pound Regains Losses Against Euro Despite Germany Reaching A Coalition Deal

15.01.18
4 minute read
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After a shaky last week, the pound has been slowly beginning to regain its losses versus the euro, as it began to climb higher before the end of trading session before weekend, to a high of 1.1288. Since then, it has dropped marginally, but has remained more or less stable today, at around 1.1263.

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.

Brexit continues to be a central focus for pound investors as the deadline for arriving at a trade deal between the EU and UK gets closer and closer. UK Prime Minister Theresa May and her cabinet's perceived inaction in arriving at a deal negatively affected the pound last week. However, the end of last week saw reports that Spanish and Dutch finance ministers are ready to back the UK when it proposes a "soft" Brexit deal to the bloc in the next EU meeting. This raised hopes of a trade deal beneficial to the UK back on the table and as a result the pound rallied.

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.

Germany finally reaches a coalition deal, three months after it held elections

So significant is the trade deal concern among investors that even as good news came in from Germany, the euro could not resist the rallying pound. Germany finally ended its political stalemate that was going on for three months now, as German Chancellor Angela Merkel announced a coalition deal with the second largest party, Social Democrats. This means that three months after Germany went to elections, it will finally have a government.

In the absence of significant economic data coming out of the EU today, investors will continue to look at political developments in Germany for any signs of instability in the coalition deal. On Tuesday, however, Germany will also release its Consumer Price Inflation figures, which measures changes in prices of goods and services in the country. This is an important figure as it measures the growth in economic activity but also becomes an important precursor for banks to raise interest rates which is usually seen as euro-positive. The pound too will continue to tackle with news about Brexit trade deal negotiations. Apart from that, on Monday, UK is set to release a set of data concerning changes in house prices. Any upward trend would be pound-positive as it would indicate growth in the housing sector of UK's economy.

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.
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