Home EUR GBP/EUR: Hopes of Second Referendum

GBP/EUR: Hopes of Second Referendum

6th February 2019

Hopes of a second Brexit referendum boosted the pound on Monday. The pound recovered earlier losses versus the euro and rallied to a high of €1.1571. This is the highest level that the pair has traded at in almost a month.

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.

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 jumped higher after a surprise announcement from the main UK opposition party leader Jeremy Corbyn. Jeremy Corbyn has confirmed that Labour will support a second Brexit referendum. He will put forward an amendment for a second public vote in the next few days. Whilst Labour have supported a second referendum from a distance for the past six months, this is the first time that they have laid down the gauntlet.

The pound moved higher because a second referendum boosts the chances of Brexit not going ahead. Given that most economists agree that Brexit is bad for the economy, avoiding Brexit would be good for the UK economy and therefore the pound.

Today Theresa May is due to give an update to Parliament over her negotiations so far. She has already informed the House of Commons that the meaningful vote will now take place later, on 12th March. This will be just 17 days before the UK is due to leave the EU. If there is no deal in place or no agreement for a second referendum, then the UK will crash out of the EU in a disorderly Brexit. This would be a worst-case scenario for the UK economy and the pound. The opposition leader Jeremy Corbyn accused May of running down the clock, so it will be a case of my deal or no deal. There are, however, reports that Theresa May will float the idea of extending Article 50, which could give her more time to secure a deal.

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.

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.

Euro Trades Higher On Dollar Weakness

The euro also traded broadly stronger at the start of the week. This was thanks to improved risk sentiment following progress in US – Chinese trade talks. President Trump extending the March 1st trade truce deadline boosted optimism that the world’s two largest economies were close to agreeing a trade deal.

In times of geopolitical tensions the value of the US dollar increases due to its safe haven status. In times of easing geopolitical tensions the dollar declines. As the euro trades inversely to the dollar, and the dollar declined on Monday, the euro therefore increased.

Today there is little on the Eurozone economic calendar which will interest euro investors. German consumer confidence could provide some support for the euro if it remains steady at 10.8 rather than declining further.

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.

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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