Update: The Euro remains in positive territory against the Pound, but is stuck at opening levels versus the US Dollar, following the day’s data releases. German retail sales posted an unexpected -2.1% decline in February, but unemployment edged down to a new record low of 5.8%. Eurozone consumer price data showed growth had fallen further-than-expected, dropping from 2% overall to 1.5% instead of to the forecast 1.8%, while core inflation eased down to 0.7% instead of to 0.8%.
Original article continues below…
The Euro continues to weaken today after taking a battering yesterday following the UK’s activation of Article 50, which officially begins the process of Brexit.
EUR GBP quickly lost a penny as Prime Minister Theresa May’s withdrawal letter to European Council President Donald Tusk made its way to Brussels.
Meanwhile, EUR USD continued a slump begun on Tuesday – falling by nearly a cent during yesterday’s session – and is currently trading at a nine-day low.
As well as the fears of economic damage to the Eurozone from Brexit, traders are also remaining cautious of the Euro due to the imminent release of German inflation data for March.
Preliminary figures are expected to show that consumer price growth slowed back below the European Central Bank’s (ECB) target range of 2%, with forecasts expecting to see prices rising at 1.8% compared to February’s 2.2%.
Monthly price growth is predicted to slow from 0.6% to 0.4%.
This would further sour trader appetite for the Euro; ECB policymakers have argued that one strong inflation figure does not mean price pressures are on the uptrend.
The latest data could prove them correct and give the dovish Governing Council even more justification for standing pat on interest rates, although Sabine Lautenschläger recently hinted at a tapering of the vast quantitative easing programme.
EUR GBP is edging down from opening levels, despite the hard line taken by European officials in response to Theresa May’s letter activating Article 50.
The UK Prime Minister said that the UK government believed it was necessary to negotiate the terms of future relations, such as trade, at the same time as agreeing the terms of the divorce.
However, German Chancellor Angela Merkel has stopped the idea in its tracks, saying that ‘the negotiations must first clarify how we will disentangle our interlinked relationship’.
This could put the United Kingdom in a tricky position, as the country may be facing a separation bill of up to £50 billion – a bill the EU may demand is paid before talks on future trade deals can even begin.
If Theresa May wishes to stick to her timetable of completing the negotiations within two years, she may be faced with a tough decision; pay up in order to secure trade agreements or risk walking away with no deal when the two-year timeframe for the discussions finishes.
The letter drew more hostility for its perceived threat that the UK would no-longer get involved in joint terror and crime-fighting operations were a suitable trade deal not agreed upon.
Although Downing Street denied that this was an attempt at blackmail, clarifying that May was simply referring to measures such as the European Arrest Warrant, the assertion was met with criticism from both sides of the Channel.
Guy Verhofstadt, European Parliament negotiator claimed it was ungentlemanly to term May’s suggestion as ‘blackmail’, but commented;
‘Saying, oh, we can do a good deal on security – internal and external – but there is also a deal that we want on trade and economics. I think the security of our citizens is far too important to start a trade off from one to the other.’
Both the Euro and the Pound are weakening against the US Dollar, however, following hawkish comments from Federal Reserve members Eric Rosengren and John Williams.
Speaking at separate events towards the end of trading yesterday, both Rosengren and Williams indicated that they still supported four interest rate hikes for 2017; a strong contrast to policymakers, such as James Bullard, who have recently commented that they see little need to hike again after raising rates earlier this month.
Rosengren, who sits in on deliberations but does not have a vote on monetary policy, believes four hikes should remain the base scenario unless the trajectory of the data changes, while Williams claimed that markets shouldn’t rule out more than three increases.
The US Dollar has responded cautiously, however, as high-impact US fourth-quarter GDP data for 2016 is set for release shortly.
A slight uptick on earlier estimates is expected, but investors are waiting to see the outcome of the final iteration of the data before altering their positions.
Further Fed speeches, including another appearance by Williams and additional addresses elsewhere from Loretta Mester and William Dudley, could give further insight into how the Monetary Policy Committee (FOMC) is feeling about the outlook on interest rates.
At the time of writing, the EUR GBP exchange rate was trading around 0.86, while the EUR USD exchange rate was at 1.07.