The pound euro exchange rate pushed higher yesterday following news that the UK economy was still just holding steady. The pound rallied to a high of €1.084 before easing back towards the end of the day. The pound is still struggling to make any sustained, meaningful move higher versus the euro. Discounting the flash crash last October, the pound is languishing at levels last seen in January 2009.
In the previous session, economic data confirmed that the UK economy was still growing at the pace anticipated by analysts. Economic growth, as measured by the GBP, was 0.3% on a quarterly basis and annualised at 1.7%. This is a slight up-tick from the previous quarter which saw growth of 0.2% and sufficient to keep investors content.
The pound will remain vulnerable going forwards as Brexit headlines are never far away. A softening of stance from Foreign Secretary Boris Johnson could potentially impact on the pound. Boris Johnson has finally conceded that the UK should pay a divorce bill from the European Union. This goes against his previous stance of refusing to pay and indicates a softening of tone in the UK government. A softer angle towards Brexit from the UK government could mean a smoother Brexit is more likely, which would be beneficial to the pound. However, the other side to the coin is that the divorce bill is expected to be astronomical, in the region of €80 billion, although the exact sum is unknown, which may not be so well received.
|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 investors will be focusing their attention on the second day of the Jackson Hole summit in Wyoming. At the summit today, European Central Bank President Mario Draghi will make a key speech. Three years ago, Draghi used the Jackson Hole summit as a platform to warn on changes to eurozone monetary policy and investors are hoping for the same again today. Whilst news agency Reuters reported earlier in the week that Draghi isn’t planning on any big announcement this time, investors remain optimistic. If Draghi fails to address when tapering of the central bank’s current bond buying programme could end, it could leave euro investors disappointed.
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