Brexit talks failing and investors eyeing Prime Minister Theresa May’s exit sent the pound lower across the previous week. The pound euro exchange rate closed at €1.14 on Friday, after falling over 1.5% across the previous seven days. The pound rebounded in early trade on Monday.
|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.|
Pound investors paid little attention to data showing that UK unemployment was at a 44-year low. Instead, domestic political woes and Brexit weighed on sentiment for sterling last week..
UK Prime Minister Theresa May has been under mounting pressure to set a date for her departure. Last week she finally caved saying that she would give a timetable for her departure after another Brexit vote in Parliament in June. The pound tumbled lower as investors grow increasingly concerned over who would replace Theresa May. The most likely scenario is a pro-Brexit candidate taking power, this means that the probability of a hard Brexit has increased. This is a less favourable option for the pound, sending the pound lower.
On Friday news that cross-party talks between the government and the Labour Party had collapsed sent the pound even lower. Without a cross party agreement Theresa May is unlikely to get her Brexit agreement through Parliament when minters vote at the beginning of June.
|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.|
The pound could experience volatility at the beginning of the new week as investors remain glued to Brexit. Theresa May is set to make a bold new offer in a last minute attempt to get MP’s to vote in favour of her deal.
The euro euro was broadly in favour across the week. Investors cheered the news that the German economy returned to growth in the first quarter of this year. This overshadowed data earlier in the week that showed that the economic climate in Germany darkened unexpectedly.
This week could be the most turbulent week for the euro so far this year. Investors will be looking towards the European Central Bank releasing the minutes of the monetary policy meeting just prior to the European parliamentary elections. Volatility could increase again as the OECD prepares to publish its latest growth projections.
|Why does poor economic data drag on a country’s currency?|
|Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.|
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