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Brexit Concerns Remain a Heavy Weight on GBP EUR Exchange Rate Trade

  • GBP EUR Exchange Rate Nears 1.11 – Pair slips as Brexit concerns persist
  • Brexit Concerns Keep Pound Volatile – Euro edges higher despite political uncertainties
  • GBP Forecast: UK Wage Data in Focus – Could influence BoE’s view of UK economy
  • EUR Forecast: ECB Speeches Today – Any shifts in direction could influence Euro

The GBP EUR exchange rate continued to fluctuate throughout Tuesday’s European session, as concerns about the Brexit process and the possibility of a ‘hard Brexit’ weighed on the Pound. Concerns about Catalonia kept the Euro from capitalising on Sterling weakness.

GBP EUR began the week at around 1.1238, but its recent hawkish trend appears to have ended as the pair has fluctuated between highs of 1.1284 and lows of 1.1210 since markets opened on Monday.

Pound (GBP) Pressured by Consistent Brexit Worries

Britain’s September Consumer Price Index (CPI) results were largely unsurprising on Tuesday, and as a result didn’t cause any changes in Bank of England (BoE) interest rate hike bets or the Pound outlook.

The UK inflation results rose from 2.9% to 3% year-on-year in September and dropped from 0.6% to 0.3% month-on-month, as analysts expected.

While inflation is putting pressure on the Bank of England to tighten UK monetary policy, some analysts remain cautious and are unsure that recent UK economic data has not been strong enough to support higher interest rates.

On top of this, some BoE officials have taken a more dovish tone too. For example, new BoE deputy governor Sir Dave Ramsden told the UK Treasury committee on Tuesday;

‘Measures of domestically generated inflation are consistent with there still being some slack in the economy: they generally remain a little below levels consistent with the 2% target,

Despite continued robust growth in employment there is no sign of second round effects onto wages from higher recent inflation.’

Later at the same Treasury committee event, BoE Governor Mark Carney spoke and issued fresh warnings about the ongoing Brexit process and that a ‘hard Brexit’ would be bad for both Britain and the European Union.

‘Hard Brexit’ concerns have worsened in recent sessions too, after mutterings emerged that the deadlock in UK-EU negotiations could lead to talks falling through and the UK government walking away with ‘no deal’. This has left the Pound volatile.

Carney also said he expects UK inflation to continue to rise due to the weak Pound, and reasserted that there could be an interest rate hike in the coming months.

According to Lukman Otunuga, research analyst from FXTM;

‘This has been a tricky year for the central bank, especially when considering how elevated inflation levels have squeezed household spending – impacting the outlook for the economy. With inflation leaving average earnings in the dust, consumers are feeling the pinch and as such, it threatens the sustainability of Britain’s consumer-driven growth.

While the argument for higher rates is to put a lid on inflation, this may end up punishing the fragile UK economy.’

Euro (EUR) Strength Limited on Catalonia Uncertainty

The Euro was unable to take advantage of a weak Pound on Tuesday, as the shared currency was also weighed down by political uncertainties.

Tensions between Spain and Catalonia remain strained since Catalonia leader Carles Puigdemont’s letter to Spanish government was seen as unsatisfactory.

Spain’s government jailed two influential separatists on Tuesday, a sign that Spain is beginning to take a more firm stance but one that could cause further clashes.

The Eurozone’s latest ecostats haven’t boosted Euro demand either.

The bloc’s final September inflation results met expectations in all major prints, while ZEW’s October economic confidence surveys disappointed.

ZEW’s October economic sentiment figure for the Eurozone dropped from 31.7 to 26.7, while the German print fell from 17 to 17.6.

Overall, amid a lack of fresh reasons to buy the Euro, Tuesday’s GBP EUR losses were largely down to Sterling weakness.

GBP EUR Exchange Rate Forecast: UK Wage Growth Results in Focus

The GBP EUR exchange rate is likely to be influenced by UK news and data in the coming days, as the Euro outlook is unlikely to change significantly ahead of next week’s highly anticipated European Central Bank (ECB) meeting.

Wednesday’s UK job market report for the three months into August could influence Bank of England (BoE) interest rate hike bets, particularly if the latest wage growth results surprise traders.

UK wage growth is forecast to have slipped from 2.1% to 2% excluding bonuses, and remain at 2.1% including bonuses.

If wage data beats expectations, it could bolster hopes that Britain’s economy is strong enough to support tighter UK monetary policy within the coming months.

The latest unemployment rate result, as well as Britain’s September retail sales results on Thursday, could also influence Sterling movement.

However, so long as concerns of a possible ‘hard Brexit’ remain, the GBP EUR exchange rate’s potential gains could be limited.