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Brexit Speculation Likely to Take Focus Again in GBP EUR Exchange Rate Trade

  • GBP EUR Exchange Rate Edges Away from Lows – Pair trends around 1.12
  • Bank of England (BoE) Hike Speculation Fades – Investors turn attention to Brexit
  • GBP Forecast: Brexit Developments to Impact Pound Outlook – UK trade data on Friday
  • EUR Forecast: Eurozone Retail Sales on Tuesday – Followed by German trade data on Thursday

Friday saw the GBP EUR exchange rate edge away from its worst levels, after the latest Bank of England (BoE) news caused Sterling to plummet. With the BoE unlikely to raise rates again any time soon, investors are likely to refocus on possible developments in the Brexit process.

GBP EUR began last week at the level of 1.1308. After briefly touching on a four-month-high of 1.1446 on Wednesday, the pair plummeted on Thursday. The pair trended in the region of 1.12 on Friday afternoon before markets closed for the week.

Pound (GBP) Recovers From Lows on Solid Services Data

In its November policy decision, the Bank of England (BoE) confirmed that it would hike UK interest rates for the first time since 2007 – from 0.25% to 0.5%.

Rather than being the beginning of any new rate hike cycle, bank officials indicated this was a one-off that may be followed by other very gradual and limited rate hikes in the coming years.

Essentially, the move reversed the rate cut that followed the pivotal Brexit vote last year.

Hawkish investors hoping for the bank to hint at future interest rate hikes were highly disappointed and the Pound dropped. For some hawkish analysts, this lowered the 2018 Pound outlook notably.

The Pound was bought up from its lows at the end of the week though, as Friday’s UK services PMI from Markit impressed investors.

October’s services stats were forecast to slip from 53.6 to 53.3, but instead improved to 55.6.

As services make up a notable chunk of Britain’s economic activity, this indicated that Britain’s economy was seeing better performance than expected in Q4 and boosted market demand for the Pound.

Still, there were some downsides to the report too. According to Chris Williamson, chief economist from IHS Markit;

‘While an upturn in business activity growth adds some justification to the Bank of England’s decision to hike interest rates for the first time in a decade, a deeper dive into the numbers highlights the fragility of the economy and points to downside risks for the outlook.

A downturn in business optimism about the year ahead, fueled mainly by Brexit-related uncertainty, suggests that risks are tilted to the downside as far as future growth is concerned. Not surprisingly, employment growth slowed for a second successive month as the business mood grew more cautious and risk averse.’

Overall, the Pound outlook worsened last week and saw investors focusing on Brexit uncertainty once again.

Euro (EUR) Losses Limited by Solid Data and Outlook

The Euro weighed on the Pound’s recovery attempts, as investors generally believe the Eurozone’s economic outlook is strengthening despite October’s dovish European Central Bank (ECB) policy meeting.

German unemployment stats came in slightly above expectations while October’s final Eurozone manufacturing PMI from Markit printed at a strong 58.5, just below the expected 58.6.

Friday saw European Central Bank policymaker Ewald Nowotny make a relatively hawkish statement on Eurozone inflation.

Nowotny stated that Eurozone inflation could be stronger than expected in 2018 due to rising energy prices. The latest ECB inflation forecast for 2018 is just 1.2%.

However, as energy prices do not have an impact on core inflation, his comments had little notable impact on Euro trade.

Amid a lack of notable shifts in the Eurozone outlook recently, Euro trade has been relatively uneventful overall.

GBP EUR Exchange Rate Forecast: Quieter Economic Calendar Ahead

The coming week’s UK economic calendar will be mostly quiet, which leaves developments in the Brexit process as the biggest potential influence for Pound trade.

October’s new car sales data will be published on Monday, followed by Halifax house price data on Tuesday.

The most notable UK data for the week will be published on Friday and includes September’s trade balance data, as well as industrial production, manufacturing production and construction output.

As the end of the year approaches, Brexit concerns are likely to return to the forefront of Pound trade.

EU chief negotiator Michel Barnier recently indicated that he was ready for UK-EU negotiations to accelerate, which has boosted hopes that UK-EU trade talks could begin before 2018.

Any signs that the next phase of UK-EU talks will begin soon would boost demand for the Pound.

Meanwhile, the Euro outlook could be influenced by upcoming Eurozone ecostats. Monday will see the publication of Markit’s final Eurozone services and composite PMIs for October, followed by retail data from September and October on Tuesday.

Germany’s September trade surplus update will be published on Thursday, but besides that it’s unlikely that Eurozone data will have a major impact on GBP EUR exchange rate movement over the next seven days.