- Euro Exchange Rates Forecast to Struggle – Brexit undermines confidence in the EU
- Pound Exchange Rates Likely to Tick Higher – Sterling is predicted to recover some losses following BoE Carney’s comments
- Domestic Data to have Minimal Impact – Political developments to overshadow ecostats
- Euro Pound Exchange Rate Forecast to Soften
EUR GBP Exchange Rate Ticks Lower on Italian Banking Crisis
The UK’s Brexit exposed holes in Italian banks, and many analysts now fear that the situation will escalate exponentially unless there is swift intervention. The issue is that Italian proposals for shoring up banks have been rejected by the European Commission.
The Italian Prime Minister is now considering taking matters into his own hands by using public finds to plug the hole. This is very problematic because it would defy the rules set by the EU Banking Commission which states that creditor funds must be used for bailout purposes.
The EUR GBP exchange rate softened in response, although the worst British construction output since 2009 reduced the appeal of Sterling.
(Previously Updated July 4, 2016 @ 09:17)
Last week was turbulent for the Euro Pound exchange rate following the UK’s historic decision to leave the European Union. In the initial aftermath of the result the Euro advanced significantly against Sterling. However, as the week progressed the Pound clawed back some of its losses thanks to a relief rally. The Pound fluctuated between lows of 1.1937 and highs of 1.2171 between June 27th and July 4th.
At the close of the week the tables were turned once again. Sterling declined significantly versus the single currency after Bank of England (BoE) Governor Mark Carney hinted at policy easing over the coming months.
Earlier in the week major credit ratings agencies downgraded the UK’s outlook in light of the expectation that the economy will move backwards while the nation gets to grips with Brexit worries.
Euro (EUR) Exchange Rates Forecast to Decline amid Fears of Brexit Contagion
Many analysts fear that the UK’s decision to leave the European Union may signal the end of the ‘economic experiment’. This is thanks to concerns that the rise of the populist parties in many member states will see several countries hold in/out referendums of their own.
There have already been wide-spread calls for the resignation of President of the European Commission Jean-Claude Junker as many blame him for the UK’s exit after David Cameron failed to get any real reforms to the relationship between the UK and EU.
In defence of his own political tenure, Juncker said: ‘I’ve been politically active for 30 years. I would suggest many younger people examine my life in detail. That would lead, though who is going to do this, to other conclusions.’
In addition to fears of contagion, there is a high chance that the single currency will soften irrespective of market sentiment. Safe-haven demand will see bond prices rise, which would limit the impact of the European Central Bank’s (ECB) asset purchase programme. Risk-appetite would also see the Euro soften as traders flock to higher-yielding assets.
Domestic data is unlikely to be hugely impactful given that trader focus is firmly set on political developments. Additionally, much of the data will pertain to a pre-Brexit Europe, making the figures obsolete before their publication.
Pound (GBP) Exchange Rate Forecast to Strengthen as Traders Take Advantage of Weak Trade Weighting
Once the prospect of Bank of England policy easing has been fully digested by traders, there is a good chance that Sterling will be pushed higher thanks to a relief rally.
This will be highly dependent on political developments, however. If the two main parties endure widening divisions, trader confidence could wane further.
Traders will be paying close attention to the candidates for replacing Prime Minister David Cameron in the hopes that a solid candidate will reduce the time delayed before enacting Article 50.
Although there will be several domestic ecostats over the coming week, the data is unlikely to have a significant impact given that it pertains to a pre-Brexit Britain, as analyst Rewan Tremethick explains;
‘As they [domestic ecostats] show what the UK looked like before the population voted for a paradigm-changing split from the EU, the data may be of little use until a few months down the line when it can be used as a reference.’
This is not to say that all domestic ecostats will have a reduced impact, however. Tuesday will see BoE Governor Mark Carney publish the central bank’s Financial Stability Report which will be of high importance given the uncertainty regarding the UK’s economic outlook at this time.
Any speeches from Bank of England (BoE) officials will also likely provoke Sterling movement over the coming week.
During Friday’s European session, the Euro Pound exchange rate was trending within the range of 0.8312 to 0.8390.