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Euro Pound Exchange Rate Benefits from UK Political Controversies

  • Euro Pound Exchange Rate Trends Around 0.88 – Pair recovers from weekly lows
  • UK Political Scandals Put Pressure on Pound – Could cabinet turbulence affect Brexit negotiations?
  • EUR Forecast: German Trade Data Ahead – As well as French production stats
  • GBP Forecast: Brexit Talks in Focus – UK-EU negotiations to continue in Brussels soon

After hopes for development in the Brexit process led to the Euro Pound exchange rate tumbling for most of the week, the pair recovered on Wednesday morning due to UK political concerns causing weakness in Pound trade.

EUR GBP opened this week at the level of 0.8880 and slipped on Monday. The pair hit a low of 0.8794 on Tuesday but recovered back to the level of 0.88 during Wednesday’s European session.

Euro (EUR) Strength Limited on European Central Bank (ECB) Outlook

Despite recent strong Eurozone data, the shared currency has seen mixed movement and its strength against major rivals has been limited.

Tuesday saw the publication of the Eurozone’s September retail sales results, which beat expectations in both prints.

September’s year-on-year retail sales results were forecast to rise from 1.2% to 2.7% but instead jumped to a much stronger 3.7% while the previous figure was revised higher to 2.3%.

The monthly results were similar, rising from a revised -0.1% to 0.7% and beating the forecast 0.6%.

Wednesday’s data was solid too. France’s September trade deficit figure only worsened to €-4.7b, better than the expected €-4.8b, while Spain’s industrial production results from September beat 3.2% forecasts and rose from 1.9% to 3.4%.

Investors have largely brushed over the strong Eurozone data though, as none of it is strong enough to alter the European Central Bank’s (ECB) long-term monetary policy outlook.

The European Central Bank (ECB) recently confirmed its plans to have a lightened quantitative easing (QE) scheme in place until September 2018 or later.

The bank also expects Eurozone inflation will weaken next year, leaving the bank under no pressure to tighten other monetary policy like interest rates any time soon.

As a result, markets perceive a greater divergence between monetary policy in the Eurozone and monetary policy in the US, as the Federal Reserve looks on track to continue tightening policy.

According to Omer Esiner, chief market analyst from Commonwealth Foreign Exchange, Washington;

‘There is a renewed focus on the diverging policy outlook between the Fed and most other major central banks,

The idea that the US is going to normalize policy more quickly than other major central banks was largely put on the back burner for most of this year,

That story has once again come back into the spotlight as a result of the ECB meeting most recently’

Pound (GBP) Under Pressure on Domestic Political Concerns

A lack of strong UK data in recent sessions and widespread political uncertainties have left the Pound’s strength limited and unstable.

Sterling had recently strengthened due largely to hopes that the Brexit process would begin to accelerate soon, but as of yet there are no signals of that becoming reality, putting a cap on Pound strength.

In recent weeks, high-profile politicians in Britain’s Conservative government have fallen into scandal and this has led to a few ministers losing their roles.

This has caused concerns that UK Prime Minister Theresa May’s government is weakening further and that this could negatively impact the Brexit process.

On Wednesday, concerns rose that International Development Secretary Priti Patel could also be sacked, for undisclosed meetings with high-ranking Israeli officials during a private holiday.

According to Jane Foley, currency strategist from Rabobank;

‘The possibility that May may have to sack another minister today does lead to another wave of speculation about the relative weakness of her government’

Overall, worries that an increasingly weak UK government could undermine a strong Brexit negotiation position caused investors to sell the Pound on Wednesday.

Euro Pound Exchange Rate Forecast: Brexit Talks to Resume Soon

UK-EU Brexit negotiations are set to resume in Brussels over the next week, which could prove a pivotal period for the Euro Pound exchange rate.

Since high-ranking EU officials recently showed more optimism about the process, markets are hoping that the process could accelerate and that trade talks could even begin within the coming months.

Any signals from Brexit talks that things are speeding up and that the first phase of negotiations could be finalised soon would lead to a big boost in Pound demand, which would push EUR GBP lower.

However, if there appears to be no change to the talks, which reports suggest are in a deadlock, the Pound could weaken and EUR GBP could rise regardless of the Euro outlook.

The European Central Bank (ECB) outlook is unlikely to be influenced by upcoming data, but the Euro could still find some support if September’s German trade data or French production stats impress.

EUR GBP Interbank Rate

At the time of writing this article, the Euro Pound exchange rate trended in the region of 0.8842, while the Pound to Euro exchange rate traded at around 1.1310.