Pound Struggles Versus Euro Amidst Brexit Negotiation Concerns and High Inflation

12.12.17
4 minute read
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The pound struggled to move higher since the Brexit divorce bill was announced early on Friday. Sterling has lost almost 1% versus the euro following the news that a deal had been struck. The pound euro exchange rate pushed briefly higher in early trade on Monday before tumbling to a low of €1.1313 for the pound. The pound has wiped out all the gains that it made in the run up to the Brexit deal being announced.

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.

Concerns over whether the EU and the UK will be able to agree a trade deal before March 2019, is unnerving investors. Chief EU negotiator has announced that trade talks will not begin until February, which makes an already tight deadline, even tighter. Without a trade deal and transition deal post Brexit, the UK is very much in danger of leaving the EU on a hard Brexit. This would be the worst-case scenario for both UK businesses and 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.

After very little high impacting economic data over the past week, investors will be relieved to shift their attention away from Brexit politics, towards UK inflation data, even if briefly. Analysts are forecasting that the cost of living in the UK remained steady last month at 3% year on year, but grew 0.2% higher month on month. Should inflation prove to be higher than anticipated, the pound could regain some lost ground. This is because, higher inflation, could encourage the Bank of England to raise interest rates again next year.

ECB To Raise Eurozone Economic Forecasts?

The mood for the euro picked up at the start of the new week. There were no highly influential data points for investors to focus on Monday, instead investors are looking ahead to Germany’s economic sentiment indicator today and European Central Bank meeting on Wednesday. Economists and investors alike, are not expecting the central bank to raise interest rates. However, growth projections for the bloc could be lifted and inflation projection may also be moved higher thanks to the increase in the price of oil. Stronger eurozone projections could boost 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.
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