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Euro Pound Exchange Rate Slumps Sharply on High Court Brexit Ruling & BoE Minutes

With markets in a more risk positive mood the Euro Pound exchange rate has softened, with investors confident that the Bank of England will not opt for additional policy easing at its November meeting.

  • EUR softened as Fed left door open for December rate hike – US political jitters offered limited support to Euro Pound exchange rate
  • Sterling boosted ahead of BoE rate decision – Markets confident that policymakers will not vote for easing at this juncture
  • Brexit court ruling prompted Pound volatility – Successful challenge could potentially disrupt exit timeframe
  • Lower Eurozone unemployment rate forecast to shore up Euro – Signs of robustness within currency union could push EUR GBP exchange rate higher

Less Dovish BoE Meeting Extended EUR GBP Exchange Rate Losses

Demand for the Pound was also boosted as a result of the latest Bank of England (BoE) policy meeting, which saw a unanimous vote to leave interest rates unchanged. Crucially the meeting minutes offered a rather less dovish tone than expected, leading markets to sharply reduce the odds of rates being cut to a fresh record low in the near future. As a result the EUR GBP exchange rate extended its losses further to trend lower in the region of 0.89.

(Previously updated at 10:44 03/11/16)

Although worries over the outcome of the US presidential election had been lending some support to the Euro this began to diminish on Thursday.

Euro Pound Exchange Rate Trended Lower after Stronger UK PMI Boosted Odds of BoE Rate Hold

More strong Chinese data encouraged investors to favour higher-yielding assets on Thursday morning, removing some of the support from the Euro (EUR). Despite recent Eurozone data having offered an encouraging picture of the domestic economy this has failed to particularly boost the single currency, with wider market sentiment remaining its primary driving force. While the Federal Reserve opted to leave monetary policy unchanged overnight markets have continued to price in strong odds of a December rate hike, a prospect that has softened the appeal of the Euro.

An unexpectedly improved UK Construction PMI helped to boost confidence in the Pound (GBP), meanwhile, as this pointed towards greater robustness within the domestic economy. With the construction sector starting the fourth quarter on a stronger footing investors were encouraged to buy back into Sterling. This positive result was seen to limit the likelihood of the Bank of England (BoE) voting to cut interest rates to a fresh low at its November meeting, despite the fact that the construction industry accounts for a limited portion of the UK’s economic activity.

Investor confidence was also boosted by the news that the High Court had ruled against the government in the dispute over the triggering of Article 50. This naturally prompted the Pound to surge across the board, pushing the EUR GBP exchange rate into a severe slump.

Pound (GBP) Exchange Rate Volatility Expected on BoE and Brexit Court Ruling

While markets do not anticipate any change from the BoE at this juncture the Euro Pound (EUR GBP) exchange rate is nevertheless likely to see some volatility ahead of the policy decision. Investors will be paying close attention to the tone of the accompanying meeting minutes, as well as commentary from Governor Mark Carney. Should the outlook of the Monetary Policy Committee (MPC) remain rather more dovish then the Pound is expected to soften, particularly if the possibility of a fresh rate cut is kept on the table.

As Morten Helt, senior analyst at Danske Bank, noted:

‘The BoE wants to support the economy through a time with elevated uncertainty. In our view, it is too early to rule out that the economy could slow due to the higher amount of uncertainty, and we still see more than 50% chance of a rate cut from 0.25% to 0.10% at the next big meeting in February, but it depends on whether the economy slows in Q4.’

Uncertainty over the issue of Brexit is also likely to weigh on the Pound ahead of the weekend, regardless of the outcome of the latest legal challenge. Despite the High Court upholding the challenge that the Prime Minister cannot trigger Article 50 without a parliamentary vote or not the decision looks set to escalate to the Supreme Court. Either way the prospect of continued uncertainty could boost the EUR GBP exchange rate.

EUR GBP Exchange Rate Forecast Higher on Improved Eurozone Unemployment Rate

If political worries continue to weigh on the US Dollar (USD) this could offer some support to the Euro over coming days. While markets reprice the possibility of a Donald Trump victory investors are likely to favour other safe-haven assets over the ‘Greenback’, something which drives up the appeal of the single currency. Friday’s US Non-Farm Payrolls report may give the EUR GBP exchange rate another rallying point, with any weakening of the domestic labour market undermining the case for the Fed to move in December.

Also in focus will be the latest Eurozone unemployment rate, which is forecast to show a modest decrease from 10.1% to 10.0%. While this remains rather more elevated that policymakers might like any improvement could bolster confidence in the outlook of the currency union. Even though a positive result is not expected to curtail market speculation that the European Central Bank (ECB) will extend its quantitative easing program in December the EUR GBP exchange rate could nevertheless trend higher on the back of this.

Current Interbank Exchange Rates

At the time of writing, the Euro Pound (EUR GBP) exchange rate was slumped around 0.89, while the Pound Euro (GBP EUR) pairing was making gains in the region of 1.12.