Pound Remains Buoyant Against Euro Ahead of Brexit Bill Vote

12.09.17
3 minute read
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The pound continued building on last week’s gains versus the euro on Monday ahead of a key vote on the Brexit Bill. The pound euro exchange rate successfully crossed the important psychological level of €1.100 for the first time since mid-August.

The Brexit Bill, which is also known as the Repeal Bill, overturns the 1972 European Communities Act. This was the act through which the UK joined the European Union. The Repeal Bill looks to turn all existing EU laws into domestic laws, essentially making the Brexit process as smooth as possible.

There are some concerns that the Labour party will attempt to derail the progress of the Repeal Bill because they believe that it gives too much power to the government to change laws without parliamentary involvement. However, the Conservatives, with the support of the Democratic Union Party (DUP) should be able to push the bill through. Should the bill pass then the possibility of a smooth Brexit increases which is beneficial 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.

Aside from the Brexit Bill investors will be looking towards UK inflation figures this morning. City analysts are forecasting that inflation, as measured by the consumer price index (CPI) will have increased in August to 2.8%. Inflation has declined for the two consecutive months. When inflation drops the central bank has less need to increase interest rates, therefore hopes of an interest rate rise were pushed further into the distance. Should inflation numbers come in higher than the rate analysts anticipate, then the pound could take another step higher.

Euro lacks direction

After all the excitement for the euro last week, with a full economic calendar and the European Central Bank meeting, this week is looking rather sparse. With little in the way of eurozone data for euro traders to digest, a speech by ECB policymaker Benoit Coeure became a focus point. Coeure suggested that the eurozone monetary policy will remain loose for longer in an attempt to offset the stronger euro. This is because when monetary policy tightens and interest rates increase, the price of the currency appreciates

Why do raised interest rates boost a currency’s value?
Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.

The reverse is also true. Which explains why the ECB may look to keep monetary policy as it is for some time yet, in order to keep a lid on the seemingly unstoppable euro strength.

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