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Boris Johnson’s Hard Line Approach Causes the Pound Euro (GBP/EUR) Exchange Rate to Fall

Pound Sterling Euro (GBP/EUR) Exchange Rate Slumps as PM to Take Hard Line Approach

The Pound Sterling Euro (GBP/EUR) exchange rate slumped on Tuesday, leaving the pairing trading at around €1.1828.

Sterling slumped today after reports suggested Prime Minister Boris Johnson is seeking a hard line on the UK’s transition period after Brexit.

According to ITV, the Withdrawal Agreement Bill would need the UK to have all arrangements to leave the EU by the end of 2020.

GBP slipped as it removes all hopes the Prime Minister would adopt a flexible approach to the 31st December deadline for a trade deal with the bloc.

Commenting on this, Mizuho Securities’ chief currency strategist, Masafumi Yamamoto noted:

‘Common sense suggests that crafting a trade deal would take at least more than a year, so markets had assumed that the transition period will be extended.

‘It seems like the big majority Johnson won is enabling him to take a hard line approach, which the market doesn’t like so much […] Considering the UK economy looks set to deteriorate as people and companies start to leave the country because of Brexit, sterling’s short-covering rally is over.’

Sterling (GBP) Slides as Real Wages Fall in Run-Up to Christmas

On Tuesday morning, data revealed that the UK unemployment rate remained at the lowest level in 45 years.

In the three months to October, unemployment remained steady at 3.8% as the number of people in work rose by 24,000.

However, further data revealed that wage growth slowed, with average earnings only rising by 3.4% a year.

This was down from 3.6% a month ago, meaning real wages have dropped in the run-up to Christmas.

Added to this, total pay growth slowed to 3.2%, the lowest level since 2018. The slump from 3.7% in September to 3.2% was also the largest drop since 2015, weighing on the Pound.

Euro (EUR) Rises as Eurozone Services ‘Encouragingly Resilient’

The single currency rallied against a weaker Sterling on Tuesday despite weak business growth in the Eurozone.

On Monday, data showed that business growth in the bloc remained weak in December. Weak foreign demand and the manufacturing slowdown offset an increase in service sector activity.

While some analysts saw some signs of stabilisation, the Eurozone flash composite PMI remained stuck at 50.6.

Commenting on the flash data, Markit’s Chief Business Economist, Chris Williamson noted:

‘The Eurozone economy closes out 2019 mired in its worst spell since 2013, with businesses struggling against the headwinds of near-stagnant demand and gloomy prospects for the year ahead.

‘While service sector growth remains encouragingly resilient in the face of the manufacturing downturn, any further softening of the labour market could cause weakness to spill over.’

Pound Euro Outlook: Weak German Inflation to Weigh on EUR

Looking ahead to Wednesday, the Euro (EUR) could slump against the Pound (GBP) following the release of the German Producer Price Index (PPI).

If inflation slumps further than expected in November, the single currency could surrender losses.

Meanwhile, Sterling could receive a boost if UK inflation rises higher than expected.

If November’s inflation comes in closer to the Bank of England’s (BoE) target, the Pound Euro (GBP/EUR) exchange rate will edge higher.