The pound tumbled against the euro in the previous session as the euro emerged as the preferred safe haven in the event of a cross Pacific War. The pound euro exchange rate dropped over 0.3% to close the day in the region of €1.0797. This is the weakest level that the pound has traded against the euro since October 2009 and is fast approaching the all-time low reached at the peak of the financial crisis, in late 2008 early 2009.
The pound continues to be out of favour with investors as the third round of Brexit talks are underway. Progress in the negotiations is looking shaky as EU President Juncker brands UK’s Brexit papers unacceptable. So far seven have been published and not one is “satisfactory”. The papers have been pointing towards a smoother Brexit, which could be more supportive to the pound, however the EU President doesn’t consider that they go far enough. Investors are waiting for signs of progress in Brexit negotiations before looking to buy into sterling. There is a strict timetable which needs to be adhered to otherwise the possibility of no deal being achieved increases which would be bad news for the pound as it increases the chance of a harsh Brexit rather than a smooth Brexit.
|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.|
As geopolitical tensions between North Korea and the US increase for the second time this month, investors are looking towards the euro as the safe haven of choice. Given the location of the potential North Korean conflict and the parties involved, the standard “safe havens” of the US dollar or Japanese yen suddenly don’t look quite so appealing. As a result, investors brought into the euro, sending the common currency northwards.
The euro has already been performing well over recent months as economic growth is ticking higher in Germany, France and across the eurozone bloc. Furthermore, the European Central Bank is also preparing to taper down its current bond buying programme (quantitative easing) which will also support the currency.
Looking ahead across the day, the euro could strengthen again on the release of business confidence figures. City analysts anticipate that the recent run of strong economic data for the block will cause business confidence in the eurozone to climb higher in August.
|Why does strong economic data boost a country’s currency?|
|Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.|
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