GBP/EUR: UK Chancellor's Statement To Drive Pound vs Euro

12.03.18
4 minute read
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The pound climbed 0.3% versus the euro on Friday, in its third straight winning session against the common currency. In total the pound climbed 0.4% versus the euro across the previous 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.

Brexit negotiations remained under the spotlight for most of the previous week as European Council President Donald Tusk warned Britain to lower its expectations regarding any post Brexit EU / UK relationship and trade deal. These comments suggest that the UK could be heading towards a hard Brexit. Despite the negativity coming from Brussels regarding Brexit, the pound remained resilient.

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.

This week politics will remain a central focus for the pound, particularly given the light UK economic calendar. U.K. Chancellor of the Exchequer Philip Hammond will give his Spring Statement on Tuesday. Although this is less important than the Autumn Budget it still has potential to increase volatility for the pound. If market participants consider Philip Hammond’s Budget to be light on detail, then the pound could drop lower.

Cautious ECB & Trump’s Tariffs Weigh On Euro

The euro loss ground in the previous week as investors digested the European Central Bank policy announcement. The ECB made a tweak to the statement which was considered slightly hawkish, moving a step closer to raising interest rates. However, ECB President Mario Draghi was also very cautious in his statement, lowering forecasts for inflation in the eurozone to 1.4% for 2019. This is still a considerable distance from the central bank’s 2% target, pushing an interest rate rise further into the future. As a result, the euro dropped.

Why do raised interest rates boost a currency’s value?
Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.

As the new week begins concerns over Trump’s tariffs were weighing on the euro. Developments over the weekend that followed Trump’s signing of his tariffs on steel and aluminium, rocked the market. It would appear that Australia will be exempt from the tariffs, but the European Union will not be.

President Trump even suggested at a rally in Pennsylvania over the weekend that he could consider taxing German car makers Mercedes and BMW. This is an aggressive move by Trump as fears of a trade war are still high. Any tariffs which could impact on the eurozone economy are considered bad news for the euro.

Looking ahead, the beginning of the week is fairly quiet as far as eurozone economic releases are concerned. German inflation data on Wednesday could create volatility for the euro, as well as inflation data for the bloc on Friday.

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