GBP/EUR: Pound Drops A Theresa May Prepares To Leave

TransferWise content team
17.05.19
3 minute read

Political uncertainty sent the pound to a fresh three month low on Thursday. The pound euro exchange rate dropped to a nadir of €1.1430 before picking up slightly towards the close.

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. 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 GBPIn 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.

The pound came under pressure as Prime Minister Theresa May set confirmed that she will set out a timetable for her departure and the election of a new prime minister in June. The Prime Minister has been under pressure to resign after she failed to deliver on Brexit. On Thursday she gave in to the pressure and said she will quit regardless of whether she secures her Brexit deal or not. Theresa May’s Brexit withdrawal agreement will go before Parliament for a fourth vote in early June.

Boris Johnson, the ex-foreign secretary and hard line Brexiteer has confirmed that he will put himself forward as a candidate. This is a concern for the pound. A leader in favour of a hard Brexit means that a more pound favourable softer Brexit is less likely to happen. Suddenly the prospect of a no deal Brexit, which had been taken if the table, is very much an option once more. The fear of a hard no deal Brexit is sending the pound tumbling lower.

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.

Once again there is no UK economic data to distract investors from domestic political woes. Investors will remain focused on Brexit and which other candidates might put themselves forward as a candidate for Prime Minister.

Will Eurozone Inflation Lift Euro?

The euro was in favour in the previous session as eurozone trade surplus data impressed. The eurozone trade surplus widened further in March to 22.5 billion from 19.1 billion. The stronger data shows that the eurozone economy was more resilient to the global trade tensions that analysts had originally feared. This improved confidence in the economic outlook for the bloc, boosting the euro.

Today the euro could receive a further boost as investors look to eurozone inflation data. Analysts expect the consumer price index to tick higher to 1.7% up from 1.4% in March. Whilst this would still be below the European Central Bank’s 2% target, it is at least a step in the right direction. Higher inflation means an interest rate rise by the central bank would be more likely, lifting the euro.

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.

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