Pound to Possibly Boost over Euro with Theresa May Brexit Speech

22.09.17
3 minute read
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The current rally in the pound euro exchange rate could be only short-lived if UK Prime Minister Theresa May fails to impress in her key speech today. The pound has been showing resilience and pushing higher these last few days. As a result, the pound euro exchange rate is sitting back comfortably above €1.1350 for sterling.

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.

There wasn’t a lot of high-impact economic data in the previous session, so investors are looking ahead to Theresa May’s key Brexit speech in Florence which could put both her leadership and Brexit back on track.

Currently, many feel Brexit negotiations in Brussels have stagnated at this point. As a result, Theresa May will likely be looking to use this speech to try to kick start the talks in hopes of progressing from Phase one, the divorce settlement, to Phase two. This next phase will include talks about the future relationship between the EU and the UK and future trade agreements.

The general consensus is that Theresa May will confirm a transition period post Brexit and an initial offer of €20 billion for the divorce bill. However, markets will be paying particular attention to anything that the UK Prime Minister has to say regarding the relationship after the transition period. Last October, Theresa May was firmly in the “hard Brexit” camp with a clean break. However she’s become known for her spectacular U-turns. Pound investors will be looking for signs that her stance is now more towards a softer version of Brexit, which would be more beneficial for the pound. Any hints of a softer 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.

Euro traders look to president of European Central Bank for direction

The mood for the euro remains mixed. Strong data out from the eurozone continues to offer support to the EU’s common currency. However, investors remain concerned over how long it will take for inflation in the bloc to move high enough for the European Central Bank (ECB) to raise interest rates. So far, inflation is refusing to budge in the eurozone, which is deterring investors from buying into the euro, even after strong economic data impresses.

Today, euro traders have both industry trend data as well as a speech by ECB president Mario Draghi to digest. Should Draghi sound slightly more aggressive in his keynote speech, then the euro could see a revival.

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