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Sharp Increase in UK Business Pessimism Dents Pound Euro Exchange Rate

Demand for the Pound remained limited at the start of the week, with markets unimpressed by a sharp decline in the latest Institute of Directors business confidence survey.

Business sentiment weakened sharply as a result of the hung parliament, with 57% of survey participants reporting themselves as either quite pessimistic or very pessimistic about the outlook for the economy in the next twelve months.

With a sense of political uncertainty still gripping markets, in spite of Theresa May’s stated intention to remain as Prime Minister, the Pound Euro exchange rate was trapped in a narrow range.

Even so, as researchers at ANZ noted:

‘Uncertainty is rife on numerous levels, and while markets were rattled, there was still a sense of containment amidst hope of a) potentially a soft Brexit; and b) less fiscal austerity.’

If there are signs that the government stance on Brexit is materially softening this could encourage investors to pile back into Sterling, in spite of any persistent sense of uncertainty that hangs over Theresa May’s tenure as Prime Minister.

Fresh downside pressure could be in store for GBP exchange rates, however, with the release of the latest UK consumer price index report.

Any slowing in inflationary pressure could dent the appeal of the Pound, raising the likelihood of the Bank of England (BoE) leaving interest rates on hold for the foreseeable future.

Even so, with consumer spending already weakening in response to an increasing squeeze on wages any further uptick in inflation could bode ill for the economic outlook of the UK.

French Election Optimism Strengthens Euro Demand

Confidence in the Euro picked up strongly in the wake of the first round of the French parliamentary elections, meanwhile.

Markets were encouraged to find that Emmanuel Macron’s En Marche movement is on track to secure a landslide victory, setting Macron in good stead to push through his economic agenda.

Such a result would encourage greater optimism in the future of the Eurozone and the wider European project, improving the appeal of the single currency further.

However, the GBP EUR exchange rate could find some support ahead of Thursday’s Eurogroup meeting, which it is hoped could result in the disbursement of the next tranche of Greek bailout funds.

If creditors fail to reach any agreement over Greece the Euro could come under renewed pressure, with a major debt repayment due in July.

Fears of a default and another Eurozone debt crisis could weigh heavily on the single currency, limiting the downside potential of the GBP EUR exchange rate in the near term.

Current GBP EUR Interbank Exchange Rates

At the time of writing, the Pound Euro exchange rate was trending lower in the region of 1.13. Meanwhile, the Euro Pound exchange rate was making gains around 0.88.