The pound was trading higher versus all its peers on Monday, however the gains it made versus the euro were marginal. On the day the third round of Brexit talks began, the pound moved to a session high of €1.0833 versus the euro, before falling back to €1.797 by the end of the day.
Sterling enjoyed a strong session despite many UK traders enjoying the UK summer bank holiday. There was nothing in the way of economic releases for pound investors to focus on, so instead Brexit news was the main driver. Investors are starting to slowly realise that a “hard” Brexit is becoming increasingly unlikely. The positional papers published by the UK government, seven in total so far, are pointing to a softer stance than the UK Prime Minister had pointed to back in October last year when she was clearly heading for a hard Brexit. A softer Brexit is considered more business friendly and as hopes of a soft Brexit increase so does the value of the pound.
|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 UK Leader to the opposition party, Jeremy Corbyn has also weighed into the debate, making a U-turn on his stance towards Brexit. He has now positioned himself in the soft Brexit arena, after previously pushing for a hard Brexit. This is no doubt a tactful move, designed to take advantage of the division in the UK Conservative party regarding Brexit. Either way, as more of the British public realize the devastating impact a hard Brexit could have on the economy, this may create a more reconciliatory atmosphere in the Brexit negotiations
With no UK influential data due for release today, Brexit headlines could continue to move the pound.
Geopolitical tensions are once again setting the tone to trading. Shortly after a missile was fired by North Korea over Japan, demand or the euro climbed higher. Often the US dollar is considered one of the go to safe haven currencies. However, as we saw during the escalation of geopolitical tensions earlier this month between North Korea and President Trump, the euro gained in popularity as the threats from Pyongyang increased in severity.
At the time of writing Trump still hadn’t responded to North Korea’s provocation. Should Trump give a solid measured response, we could see this incidence dye down relatively quickly. However, measured is not a word often associated with President Trump, so this could just be the beginning of round two.