Pound Tumbles to Fresh Year to Date Lows Versus Euro

22.08.17
3 minute read
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Amid a shortage of high impacting economic data, the pound euro exchange rate tumbled over 0.5% to €1.0912. This is a fresh low for the pound versus the euro so far this year. Excluding last October’s flash crash, this level was last seen in 2009, 12 years ago.

The pound had managed to gain ground against some of its peers, for example the US dollar. However, sterling was noticeably lower against the euro following the release of two more position papers. These are papers published by the government, laying out the UK’s stance in the negotiating of Brexit. They offer some much needed clarity as to how the government views Brexit. But, at the same time it's worth noting that they're in fact no more than wish lists, as they need to be agreed to by the EU.

Monday’s papers stated that the UK was seeking “frictionless trade” one day after Brexit. Meanwhile the second paper centered on shared information and confidentiality. The government seems to be heading in the direction of a smooth Brexit, which will offer some support towards the pound.

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.

Euro started the week with gains

Today’s economic calendar is set to be slightly busier than yesterday’s. Investors will look towards UK public sector net borrowing (PSNB) figures to see if last month's jump was a one off. June saw PSNB increase to £6.9 billion, up from May’s £6.7 billion and £2 billion more than June last year. A large deficit in UK national account is considered negative for the economy; therefore should the PSNB grow more than the £0.4 billion anticipated, the pound could sink lower.

Demand for the euro has remained firm despite a lack of noticeable datasets. The common currency did slip last Thursday following the terrorist attacks in Barcelona. However it quickly recovered. Currently investors see few reasons to sell out of the common currency and are instead waiting to digest the next batch of economic data and / or news from the Jackson Hole meeting.

German ZEW economic sentiment data is due to released this morning. City analysts are forecasting that German economic sentiment has dropped slightly to and index of 15 in July from 17.5 in June. A larger drop more than the 15 anticipated could see the euro rally slow.

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