Pounds Drops Against A Strong Post Christmas Euro

28.12.17
4 minute read
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The pound euro exchange rate continues to trade in a very tight range. The majority of market participants are taking a time off between Christmas and the new year, to return in earnest in January. The pound dropped marginally versus the common currency to end the day at €1.1265.

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.

With politicians away for the Christmas break, there are very few headlines concerning Brexit for pound traders to focus on. Brexit is the single most important driver of the pound, so suggestions from Lord Macpherson, former UK Treasury head that Brexit may have a limited impact on the UK economy could be calming. This is because Lord Macpherson was the most senior civil servant prior to Brexit. This is an interesting comment coming from him also because as he was one of the leaders of so called “project fear”. This was a group of Remainers who were predicting catastrophic outcomes for the UK economy should Britain vote to leave the EU.

While the UK has suffered increased inflation and lower economic growth since the Brexit referendum, there has definitely not been the apocalyptic outcome that project fear had predicted. Lord Macpherson now seems relatively upbeat, suggesting that Brexit’s impact could be limited if the government seizes policy opportunity and look forwards not backwards. The next phase of the Brexit negotiations is due to begin in March. The EU and the UK will discuss the future relationship and a possible trade deal. A positive outcome here, could ensure a smooth Brexit, which is favourable for the pound.

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.

Euro In Favour As Catalonia Fears Ease

The euro traded higher across the board on Wednesday as political jitters over Catalonia in Spain eased. After the election last week, which saw pro-independence parties win, investors were nervous. However, the King of Spain has since called for an end to confrontation, police reinforcements in place since October have also been pulled back from Catalonia. The independence drive is by no means going away, however a more diplomatic route appears to be on the cards.

Adding to the relief, the Bank of Spain estimated that Spain’s economy grew 0.8% in the final quarter of 2017, from the previous quarter. This comes as a relief for investors as data showed that an increase in exports counteracted the impact of the crisis in Catalan on the Spanish economy.

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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