GBP/EUR: As Hopes For A Smooth Brexit Decline, Pound Lower vs. Euro

07.12.17
3 minute read
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The pound euro exchange rate had another rollercoaster session on Wednesday, as the Brexit drama continued. The pound tumbled to a session low early on, of €1.1296, before reversing to a high of €1.1362.

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.

Sentiment towards the pound has been falling in recent sessions, given that there has been very little progress over the Irish border issue. The border dispute between Ireland and Northern Ireland is one of the few remaining sticking points which is preventing Brexit divorce talks progressing to post-Brexit trade talks. There has been a considerable amount of back and forth in discussions, with investor hopes building and falling quickly and frequently within a given session.

Should UK Prime Minister Theresa May fail to find a solution to the problem before next week’s deadline, trade and transition deal talks could be pushed further into the distance. This would make a smooth Brexit less likely.

Why is a smooth Brexit good for the pound?
A smoother Brexit would be a scenario in which the economic consequences of leaving the European Union are minimised. This is favourable for the pound because the less the Brexit impact on the economy, the more likely that foreign investors will remain interested in the UK. Foreign investors need sterling to invest in the country and so the more GBP is purchased, the higher the demand and, thus, an increase in the currency’s value.

The lull in UK economic data continues today, which means that once again pound traders will have little else to distract them from the Brexit dilemma. Any signs that the UK could be judged as having sufficiently progressed the Irish border issue, could see the pound rally. Conversely, headlines pointing to a continued standoff, could pull the pound lower.

Eurozone GDP data in focus

The previous session saw mixed economic data coming from the bloc. Data from Germany, which is often considered the powerhouse of Europe, showed that construction activity fell to a 10-month low. The construction sector had been gaining momentum in previous month, so investors were taken aback by the lower than forecast reading.

The disappointment was quickly overshadowed by industrial order data, which beat analysts’ expectations. Industrial orders increased 0.5% in October significantly above the -0.3% decline predicted. The data showed that there was an increase in both domestic and overseas demand which points to continued economic growth in Germany

How does strong jobs data boost the currency?
It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the good and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes the worth of the currency higher.

Today the eurozone GDP figure will be in focus. Analysts are anticipating growth to hold steady at 0.6% quarter on quarter and 2.5% year on year.

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