The pound has continued its sharp decline versus the euro as Britain braces itself for the start of the Brexit talks. Brexit nerves saw the pound drop 0.4% of its value versus the euro on Friday, finishing the week at €1.1414. Anxieties continued to get the better of the pound as the new week starts. Sterling has already been as low as €1.1389, although it’s picking up slightly as Monday moves into focus.
|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.
Today, Britain and the EU will begin the first day of Brexit negotiations. David Davis, Britain’s Brexit secretary, will meet with Michael Barnier, the chief negotiator for the European Union. No big clashes are expected for the first few weeks. Both sides will be looking to lay out their views, plan practicalities and set agendas ahead of the more complicated, detailed talks a little later down the line. However, this hasn’t stopped investors from already getting nervous.
The political landscape in the UK is far from an ideal one with which to be entering into these negotiations. UK Conservative leader Theresa May gave a very poor performance in the most recent general elections. Furthermore, she still needs to seal a deal with Northern Ireland’s Democratic Unionist Party (DUP) to gain a working majority in Parliament. These complications, plus that fact she is fighting for her political position, make the direction of Brexit very unclear. Political risk looks set to keep the pound vulnerable in the short term.
|How does political risk have impact on a currency?|
|Political risk drags on the confidence of consumers and businesses alike, which means both corporations and regular households are then less inclined to spend money. The drop in spending, in turn, slows the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. Signs that a country is politically or economically less stable will result in foreign investors pulling their money out of the country. This means selling out of the local currency, which then increases its supply and, in turn, devalues the money.|
The euro was also gaining in strength as the pound declined. Investors cheered a solid win for French President Macron’s party La Republique En Marche, which won a large majority in the French Parliamentary elections on Sunday. The newly formed party and its centrist ally Modem, pushed mainstream parties aside to win 350 of 577 seats. This means that President Macron now has a strong mandate to push through his pro-European Union and pro-business reform policies. Macron plans to embark on reforms to boost the French economy and restore France’s influence in Europe; both of which are good news for the euro. However, given that a substantial win for Macron was widely expected, the upside for the euro from this event could prove to be limited.
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