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Brexit Imminent – Could Pound Euro Exchange Rate Be Affected by Timing of Article 50?

Demand for the Pound to Euro exchange rate improved on Thursday and the pair edged upwards at a modest rate of 0.2% for most of the day.

While this was largely due to the day’s better-than-expected UK construction PMI from Markit, traders also remained hopeful that the activation of Article 50 could be delayed as the Brexit pill is ‘ping-ponged’ between the House of Lords and House of Commons.

Naeem Aslam from Think Markets believes that the Pound could indeed by influenced by how smoothly UK Prime Minister Theresa May’s Brexit plan passes through Parliament;

‘If she can trigger Brexit as per her deadline, it may push sterling even lower as this will send the message that Theresa May is in full control and her hard Brexit is taking shape.

On the flip side, if she cannot deliver this on time, this could be a positive thing for sterling, and the currency could rally all the way to US$1.28, with a potential target of US$1.30 a realistic target as well.’

[Previously updated 16:55 GMT 01/03/2017]

Uncertainty remains high as to whether the activation of Article 50 could be delayed by Brexit bill amendments from the UK House of Lords, leaving the Pound to Euro exchange rate reacting to UK ecostats on Wednesday afternoon.

The unexpected slow in Britain’s manufacturing sector in February caused many investors to grow concerned that it could be the beginning of a long-term slowing trend.

Investors are also anxious that Britain’s other sectors have slowed. As a result, Thursday and Friday’s construction and services PMIs will be watched closely by markets.

The Euro has been able to capitalise on Pound weakness this week thanks to solid Eurozone ecostats. Wednesday’s preliminary German Consumer Price Index (CPI) for February was especially impressive, improving from 1.9% to 2.2% year-on-year to beat the forecast figure of 2.1%.

[Previously updated 12:53 GMT 01/03/2017]

The Pound to Euro exchange rate continued to slip on Wednesday morning as investors became concerned that Britain’s manufacturing sector may be slowing.

Markit’s February manufacturing PMI failed to meet expectations of 55.6, instead falling from 55.9 to 54.6.

However, Sterling could be bolstered in the coming weeks if the latest developments from the House of Lords lead to amendments to the Brexit bill.

The Labour party’s proposition to call for the UK government to secure the rights of EU nationals living in Britain has received formal backing from a Conservative Lord, a Liberal Democrat Lord and a crossbencher Lord.

If it passes through the House of Lords, not only will EU workers be more likely to remain in Britain following Brexit but the activation of Article 50 may be delayed by at least a week.

Amendments passing in Lords would mean the debate has to return to the House of Commons before it can be passed into law. If Article 50’s activation is delayed, this could offer the Pound some brief Brexit relief.

[Published 06:00 GMT 01/02/2017]

While the Pound to Euro exchange rate trended largely flatly around the level of 1.17 during Tuesday’s European session, Brexit jitters could well worsen now that March has begun.

The UK government has repeatedly made clear that it intends to activate Article 50 and begin the formal process by the end of March 2017. This means that within the next month, Britain will officially be in the formal EU divorce process.

The reality of the Brexit still has yet set in on some traders, who hold onto hopes that the House of Lords will demand that the UK government makes single market access and free movement part of Brexit negotiations.

This means as the activation of Article 50 approaches, the Pound is likely to see additional pressure throughout the month and may struggle slightly to benefit from the usual upsides.

The possibility of a hard Brexit (a Brexit without keeping full access to many of the EU’s major benefits) also looked increasingly likely this week.

On Monday night, debate in the UK House of Lords saw Lords voting against an amendment for UK Prime Minister Theresa May to commit to keeping Britain in the EU single market.

The opposition government, Labour, largely backed the Conservative government’s stance. Shadow Brexit minister, Lady Hayter of Kentish Town, commented on the decision;

‘With regard to free movement, we cannot simply airbrush this from the referendum decision. For if we turn round to those who voted out, and we say ‘yes we are out, but actually we are still having everything exactly as it was, we are still having free movement unchanged’, I think that might emit some surprise.’

GBP traders have also been worried about the possibility of a second Scottish independence referendum and a cut off point for EU free movement to the UK in the coming months.

Analysts aired reminders on Monday evening that a second Scottish referendum would not be possible without a greenlight from UK Prime Minister Theresa May.

UK officials have also hinted that EU free movement would not be cut off immediately as rumoured but would instead be part of Brexit negotiations.

This cooled the Pound selloff on Tuesday, but the Euro remained sturdy and held most of its Monday gains thanks to solid Eurozone ecostats as well as hopes that this year’s French election may not see a populist victory for Marine Le Pen after all.

Marine Le Pen is the leader of France’s anti-EU nationalist party the National Front (FN) and has indicated she would remove France from the Eurozone if she became President this year.

However, last weekend her independent opponent, Emmanuel Macron, extended his lead in the second round of the election according to fresh polls.

This week’s Eurozone ecostats included a solid Eurozone business confidence report from February, with the figure improving from 0.76 to 0.82 and beating the projected 0.79.

Tuesday’s session saw the publication of France’s preliminary Q4 Gross Domestic Product (GDP) results and February Consumer Price Index (CPI) figures. These all largely met expectations and helped the Euro remain buoyed.

More key Eurozone data is due for publication throughout Wednesday and Thursday which could lead to GBP EUR being influenced by Euro movement while Brexit jitters hold back the Pound.

Germany’s February employment report will be published on Wednesday morning, followed by preliminary February inflation figures in the afternoon.

Then on Thursday the Eurozone’s January unemployment rate and preliminary yearly February inflation stats will be published.

Sterling may continue to react to Brexit jitters for most of the week, but traders will certainly pay attention to Britain’s February PMIs from Markit – especially the services and composite prints due for publication on Friday.

As it stands, the Pound to Euro exchange rate is unlikely to see a strong recovery until later in the week unless Eurozone data disappoints or the UK House of Lords impresses investors by attaching conditions to the Brexit process.