Euro Lower Versus the Pound amidst Spain's Political Turmoil

02.10.17
4 minute read
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The euro wobbled against its major peers as the markets opened amid scenes of violence in Spain on Sunday evening. Despite a small initial fall versus the pound, the euro managed to pick itself up, trading at €1.1345 over sterling heading into Monday.

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.

The UK Conservative Party conference continues on Monday amid stories of cabinet infighting and squabbles. UK Prime Minister Theresa May needs to show herself as a strong leader with a clear Brexit plan as concerns over her leadership abilities and blurry Brexit vision continue. Chancellor of the UK Exchequer Philip Hammond is due to speak tomorrow, with Theresa May taking to the stage on Wednesday. Pound traders will be paying particular attention to any further hints over Brexit, or any signs that Theresa May’s position as Prime Minister could be in danger, which could then weigh on the pound.

How does political stability boost a currency?
Political stability boosts both consumer and business confidence, which means corporations and regular households alike are more likely to spend money. The increased spending, in turn, then boosts the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. For foreign investors to put their money into an economy, they need local currency. As they acquire the money needed, the demand for that particular currency increases, which then boosts its value.

As the new month begins, the market will process the usual release of economic trend data in the manufacturing, construction and service industries. Analysts are expecting today’s data to show that the manufacturing industry expanded at a slower pace in September than it did in August. Should the figure beat analysts’ expectations, the pound could push higher versus 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.

90% vote for independence in illegal Catalan vote

The euro tackled the independence vote in Catalan fairly well, slipping only slightly during the open. Spanish police used extensive force, including batons and rubber bullets, while trying to prevent the independence referendum from happening. More than 800 protesters have been injured in the standoff that has been condemned by world leaders. The government of Spain is considering the vote to be illegal, while about 2 million Catalans supposedly turned out to vote. Although the results are not due to be released until later this week, Catalan independence supporters are claiming a huge win. This has turned into a political nightmare for both Spain and the European Union. Spain is the fifth largest economy in Europe (the fourth after Brexit concludes) and Catalonia accounts for around 20% of Spain’s economic output.

The reason behind the euro’s relatively relaxed response is most likely because of holidays in both China and Australia, due to which trading has been light before the Asian markets open. There is a possibility that as European markets open this morning, the political instability created by the situation in Catalonia could see the euro drop versus the pound.

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