The pound has been advancing against the euro for over a week and today was no different. The pound pushed higher against the euro to €1.0950, a level last seen on August 21st. However, the pound may find its strength is short lived, depending on Brexit policies.
A report leaked from the Home Office showed that the government was looking to take a very hard stance against immigration when Brexit happens in March 2019. The papers detailed how the government was planning on limiting the inflow of EU workers through tighter border controls and through fining companies who employ EU over UK applicants.
Over the summer the government released paper showing its position in the negotiations. There had been some hope that the position had softened, encouraging a smoother, Brexit with a transition period. However, this leaked paper points to a hard cliff edge Brexit which would impact negatively on business. Over the long term the implementation of this immigration policy could cause heavy losses for 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.|
With little influential UK data due to be released today, pound traders will instead look ahead to Friday for a consumer inflation report and manufacturing and industrial production numbers.
Euro traders have been looking towards today’s European Central Bank policy meeting for what seems like an age. Investors have been hoping that ECB President Draghi will begin discussing the winding down of the €60 billion per month bond buying programme, which has been supporting the eurozone economy for the last 3 years. With the eurozone economy now showing a robust recovery, investors have been assuming that in September’s meeting Draghi will give more information as to how and when the programme will be tapered. This is considered a tightening of monetary policy and would push the euro higher.
However, analysts are now doubting whether Draghi will discuss the tapering in depth at this meeting. Instead he may well discuss the problems that the euro strength is causing the ECB in reaching its policy goals. Should this be the case then the euro could fall on the disappointment.
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