A fresh wave of Brexit speculation shored up the Euro Pound exchange rate on Monday morning, with investors jittery ahead of Theresa May’s speech on the subject.
- Strong Eurozone data encouraged hopes of ECB hawkishness – Currency union continued to show signs of robustness
- Pound slumped across board on hard Brexit fears – Theresa May expected to signal potential loss of single market access
- US Dollar likely to remain volatile ahead of Trump inauguration – Markets continue to lack clarity over economic plans
- ECB policy meeting forecast to weigh on Euro demand – Less hawkish policymaker commentary could dent single currency
Demand for the US Dollar remained solid, on the other hand, despite US markets being closed for a bank holiday at the start of the week.
Pound Rallied on Increased Government Clarity on Brexit
Investors were surprisingly encouraged by Theresa May’s first major speech on Brexit, despite the Prime Minister signalling that the government is not seeking continued single market membership. Instead the Pound was boosted by the reduced uncertainty that this announcement delivered, prompting the EUR GBP exchange rate to slump sharply.
However, Sterling’s rally struggled to sustain itself for long, allowing the EUR GBP pairing to regain ground and trend higher in the region of 0.86 on Wednesday morning.
(Previously updated at 16:59 on 16/01/17)
Strong Eurozone Trade Data Offered Limited Euro (EUR) Boost
A better-than-expected Eurozone trade balance saw the EUR GBP exchange rate extending its gains further at 0.87, with the surplus having widened to 25.9 billion in November.
While this bodes well for the robustness of the domestic economy, however, it was not enough to shore up the EUR USD currency pair which continued to trend lower in the region of 1.06 towards the close of the European session.
(Previously updated at 12:15 16/01/17)
ECB Policy Meeting Forecast to Trigger Euro Exchange Rate Volatility
Ahead of the weekend the Euro (EUR) benefitted from a general weakening in market risk appetite, as well as an unexpectedly strong uptick in the German wholesale price index. Prices were found to have risen 2.8% on the year in December, pointing towards an increase in inflationary pressure within the Eurozone’s powerhouse economy. This strong showing increased speculation that the European Central Bank (ECB) could take a more hawkish view on monetary policy in the coming months, improving the outlook of the single currency.
However, ahead of January’s ECB policy meeting the Euro could come under renewed pressure, with policymakers unlikely to begin tapering the quantitative easing program in the near future. President Mario Draghi is expected to maintain a more cautious tone with regards to the policy outlook, limiting the upside potential of EUR exchange rates. As analysts at Deutsche Bank noted:
‘If current data trends continue, the outright taper decision could accelerate to June rather than September, but the latter is our baseline. The key is whether inﬂation, especially core, is becoming more likely to exceed ECB forecasts. Euro area headline inﬂation should rise sharply in January and February, to 1.6% and 1.8% YoY respectively. That said, mid-year is the earliest that the less convincing core inﬂation will satisfy the minimum conditions for policy tightening.’
Pound (GBP) Rates Slumped on Suggestion of Hard-Line Brexit Speech from May
Although Sterling (GBP) had recovered some confidence towards the end of last week this progress was promptly erased on Monday. Investors were spooked by the suggestion that Theresa May will take a hard line in her speech on Brexit, signalling that the government will not seek to maintain its access to the single market or customs union. This prompted the odds of a hard Brexit to rise sharply, pushing the Euro Pound (EUR GBP) exchange rate to a fresh two-month high.
The prospect of a more severe break from the EU is expected to weigh heavily on the Pound this week, unless May’s speech proves to be more moderate in tone than anticipated. While December’s Consumer Price Index could offer Sterling a rallying point the focus of markets is likely to remain centred on the issue of Brexit. Even so, higher inflation could still encourage hopes of the Bank of England (BoE) returning to a tightening bias sooner rather than later.
EUR USD Exchange Rate Under Pressure Ahead of US Inflation Data
There was some disappointment from Friday’s raft of US data, as both the advance retail sales figure and University of Michigan confidence index fell short of forecast. This did not help to restore confidence in the US Dollar (USD), which trended lower in the wake of an uninspiring press conference from Donald Trump. With clarity over the president elect’s economic plans still decidedly lacking the appeal of the ‘Greenback’ was somewhat muted, although its underlying trend remained bullish.
The Euro US Dollar (EUR USD) exchange rate could trend lower if Wednesday’s US Consumer Price Index proves positive. Forecasts point towards inflation rising from 1.7% to 2.1% on the year in December; something which would offer further encouragement for the Federal Reserve to raise interest rates imminently. While the CPI is not the Fed’s preferred measure of inflation a stronger showing here would still bode well for the outlook of the world’s largest economy. Political developments are also expected to provoke volatility for the US Dollar, with market caution likely to mount ahead of Trump’s inauguration.
Current Interbank Exchange Rates
At the time of writing, the Euro Pound (EUR GBP) exchange rate was trending higher at 0.87, while the Euro US Dollar (EUR USD) pairing was slumped in the region of 1.05.