Pound Resists Against Euro Even As Brexit Trade Deal Moves Further Into Distance

09.01.18
4 minute read
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The pound has been consistently growing in value compared to the euro, bringing much-needed relief for pound investors. Beginning yesterday's trading session at 1.1272 the pound consistently rose through the yesterday and early today to reach a high of 1.1347 and staying at this level. This is the highest level the pound has been, versus the euro, in a 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.

Today saw the release of German Industrial Production data, this index measures the change in the total inflation-adjusted value of output produced by manufacturers, mines, and utilities in Germany. The reading was slightly higher than the analysts had expected. In another of encouraging data from the EU, economic confidence index in the bloc has hit its highest level since 2000. The index shows that the morale of investors and industrialists in EU has risen and the bloc continues to be growing in economic activism.

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.

This means that investors continue to be worried about the persistent stalemate in Germany's political situation, which is why the euro is unable to resist against the value of the pound. Reports suggest that Germany's Chancellor Angela Merkel has entered coalition talks with Social Democratic Party, the other leading German political party. This is Merkel's final attempt to finally form a new government since the election three months ago. However, reaching an agreement with the Social Democratic Party is challenging due to the demands on issues such as welfare spending and taxation. Should the talks be successful, the euro could regain its momentum.

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.

Theresa May re-shuffles her cabinet, prepares for a No-Deal Brexit

More data is expected out of the UK today and tomorrow. The UK released its manufacturing production numbers, showing a resilient UK economy. However, more data relating to growth in manufacturing industry is expected to come out of the UK and a reading higher than analysts' expectation could further support the rallying pound. Also, important data is expected to be released from EU today in the form EU unemployment rate. The data reports the cumulative percentage of unemployed individuals in the EU countries. A low unemployment rate is usually associated with increased expenditure, and therefore is an important indicator of economic activity in the EU as a whole. Therefore, this might impact the strength of the euro versus pound.

As UK Prime Minister Theresa May re-shuffled her cabinet, some newspaper reports suggest that May appointed a minister specifically charged with the task of dealing with a no-deal Brexit. This could mean that the UK is considering no-deal as a real possibility. As the deadline for arriving at a decision upon trade agreements in the negotiations between the EU and UK is fast approaching, investors will keep a close watch on this for any new developments.

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.
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