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EUR/GBP Exchange Rate Predicted to Remain Stronger, Brexit Vote Tomorrow

EUR GBP Exchange Rate

  • EUR/GBP Exchange Rate Lower as Opinion polls suggested greater ‘Remain’ support – Pound rallied strongly as odds of ‘Leave’ victory declined
  • Better-than-expected German confidence survey failed to boost Euro – Single currency muted by lack of safe-haven demand
  • German Constitutional Court dismissed complaint against ECB’s OMT programme – Door opened for further easing measures
  • Referendum speculation predicted to remain dominant factor in EUR/GBP exchange rate movement – Pound forecast to weaken ahead of referendum result

Brexit Worries Increasingly Weigh on Pound (GBP) Ahead of Critical Vote

Confidence in the Pound (GBP) faltered on Wednesday, as opinion polls continued to demonstrate a narrow margin between the ‘Leave’ and ‘Remain’ camps. With the opening of the polls just hours away the appeal of Sterling is expected to remain muted. As a result the Euro to Pound Sterling (EUR/GBP) exchange rate was trending higher in the region of 0.7690 towards the close of the European session.

(Previously updated at 13:27 on 22/06/2016)

The EUR/GBP exchange rate continued declining on Tuesday as tensions surrounding the UK referendum eased somewhat during the early week, although the Pound is expected to come under greater pressure as the final decision draws nearer.

As well as advancing on the Euro, the Pound was able to achieve a five-month high against the US Dollar.

On Wednesday the EUR/GBP exchange rate clawed back some of its previous losses, advancing to a high of 0.7701. However, positive Euro movement was limited ahead of the UK’s EU referendum vote.

EUR/GBP Exchange Rate Falls as Pound (GBP) Buoyed by Reduction in Odds of Brexit Vote

There was a surprising surge in optimism at the start of the week, pushing the Pound (GBP) higher across the board ahead of the UK’s EU membership referendum. Investors were greatly encouraged by the final round of opinion polls, which indicated that support had swung back towards the ‘Remain’ campaign. As the odds of a Brexit declined in response the Pound entered a strong bullish run on Monday, making substantial gains against rivals despite the fact that a vote to leave the EU is still a possibility.

Safe-haven demand declined sharply in response to this increased market confidence, dragging on the Euro (EUR) in spite of its relatively close association with Brexit-based risk. Although German Producer Prices proved stronger-than-anticipated in May this was not enough to buoy the single currency against its bullish rival. While this stronger showing would seem to suggest that inflationary pressure is building within the Eurozone’s powerhouse economy investors remained primarily concerned with referendum developments rather than domestic data.

Stronger German Sentiment and Constitutional Court Ruling Failed to Shore up Euro (EUR) Demand

Sterling maintained its buoyant outlook on Tuesday despite the May UK Public Sector Net Borrowing figure indicating that new government debt had risen by 9.1 billion Pounds. While this was a narrower increase than anticipated the result nevertheless highlighted that Chancellor of the Exchequer George Osborne is unlikely to achieve his goal of eliminating the deficit before the end of the current parliament. However, the mood towards the Pound remained largely optimistic thanks to increasing speculation that the UK will avoid a Brexit this week.

Confidence in the Euro remained persistently weaker, meanwhile, thanks to market risk appetite and a relative recovery in the US Dollar (USD). While the German ZEW Economic Sentiment Survey strongly bettered expectations in June, rising from 6.4 to 19.2, this was not enough to shore up demand for the single currency. Comments from European Central Bank (ECB) President Mario Draghi discouraged investors, as the policymaker once again reiterated the need for Eurozone governments to support the monetary stimulus of the ECB with fiscal reform.

Even so, the Euro to Pound Sterling (EUR/GBP) exchange rate avoided greater volatility thanks to the German Constitutional Court rejecting a complaint against the ECB’s OMT programme, as Carsten Brzeski, Chief Economist at ING, noted:

‘Similar to the British referendum in two days from now, the German Court’s ruling had the potential to shake the European Union or at least the monetary union to its very foundations. Fortunately, it did not.’

EUR/GBP Exchange Rate Forecast: Brexit Speculation to Dominate Pound and Euro Outlook

Markets are expected to remain determinedly focused on the EU referendum with the ultimate result just days away now, with the impact of domestic data likely to be more limited than normal. As no change is forecast for today’s Eurozone Consumer Confidence figure the common currency is only likely to regain ground against the Pound if Brexit worries see a resurgence.

Likewise Thursday’s raft of Eurozone Manufacturing, Services and Composite PMIs are expected to offer minimal impact at the time of release. However, if growth is shown to have slowed on the month then the EUR/GBP exchange rate could struggle to make particularly bullish gains. More extreme volatility should be expected for the currency pair on Friday morning, when the outcome of the referendum will be announced.