GBP/EUR rate driven by Brexit talks and release of PMIs

03.07.17
4 minute read
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The pound finished last week at about the same level versus the euro as it started, struggling to remain above €1.1400 for any extended period of time. After central bankers stole the show last week, Brexit negotiations and economic data will be back in the driving seat for the pound-euro currency pair this week.

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.

Reports over the weekend reveal that there has been a considerable change in mood in the Department for exiting the European Union (DExEU) since the general election in June. The influence of the Treasury is growing, forcing ministers to choose between prioritising Britain’s economic interests or sovereignty. Business influences that were silent pre-election are now finding their voices again and are more supportive of a high-access soft Brexit deal. Any signs over the course of the next week that the DExEU could be softening its approach would help support the pound.

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.

Manufacturing PMI’s in focus

The other key area this week for both the euro and the pound are the release of economic health indicators, as measured by PMI’s. The PMI’s are released for the manufacturing sector today, the construction sector on Tuesday and finally the service sector on Wednesday. A figure over 50 represents expansion within the sector, whereas a figure below 50 indicates contraction.

The manufacturing PMI is important for both the pound and the euro because manufacturing contributes to a large total of the UK and eurozone GDP. It’s considered an important indicator not just of business conditions in that sector but for the overall economic conditions of the region.

Whilst the eurozone is expected to print at 57, the UK is forecast to print at 56.7. Weaker figures from either would pull that particular currency lower.

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.

The other area of interest today will be the unemployment level for the eurozone. The rate is expected to tick down to 9.2% from 9.3% the previous month. A fall in the unemployment rate is considered positive for a currency, so a larger decrease than expected may find the euro pushing itself ahead of the pound.

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