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Could Brexit Jitters Boost Euro Pound Exchange Rate Higher?

Ahead of the weekend the Euro was encouraged to trend higher against its rivals, boosted by better-than-expected Eurozone PMIs.

Growth in France and German proved stronger than forecast in March, pointing towards a more robust Eurozone economy.

The German manufacturing PMI was particularly encouraging, strengthening from 56.8 to 58.3 as the sector continued to expand bullishly.

As Trevor Balchin, senior economist at IHS Markit, noted:

‘Firms responded to capacity pressures in March, with the rate of job creation in the private sector almost matching the survey record set six years ago.

‘Inflationary pressures continued to build, with input and output prices both rising at the fastest rates in around six years.’

Although the recent tone of the European Central Bank (ECB) has been dovish this strong showing still boosted the appeal of the Euro.

With centrist French presidential candidate Emmanuel Macron continuing to pull ahead in the polls worries over populism have remained muted.

Even so, as the first round of voting approaches the upside potential of the single currency is likely to be limited.

Weakness could be in store for the EUR GBP exchange rate if Monday’s IFO business survey highlights softening sentiment.

Any signs of faltering business confidence could weigh heavily on the Euro, signalling a more bearish outlook for the Eurozone’s powerhouse economy.

After a bullish run the Pound returned to a weaker footing on Friday, as the boost from the week’s strong data faded.

Investors were not encouraged by a weaker BBA loans for house purchase figure, which dipped from 44142 to 42613 in February.

This pointed towards a slower housing market, highlighting a more subdued level of consumer confidence.

In spite of the sharp upticks in domestic inflation and retail sales the outlook for the UK economy remains uncertain.

With household finances set to be increasingly squeezed as inflation outpaces wage growth, the high levels of consumer spending that have supported the economy are expected to diminish.

As the triggering of Article 50 approaches Brexit-based jitters have also been on the rise once again.

Given the fraught nature of the upcoming negotiations and the lack of clarity over how the final deal will look the underlying trend of the Pound is likely to remain bearish.

This could see the EUR GBP exchange rate rally strongly once the formal start of exit proceedings is announced, particularly if both sides maintain a harder line of rhetoric.

If comments from Bank of England (BoE) policymakers also continue to talk down the possibility of an interest rate hike this could limit demand for Sterling.

Current EUR GBP Interbank Exchange Rates

At the time of writing, the Euro Pound exchange rate was trending bullishly at 0.86. Meanwhile, the Pound Euro exchange rate was slumped in the region of 1.15.