Brexit Uncertainties Mean Eurozone News Could Drive Euro to Pound Exchange Rate This Week
Comments from UK Prime Minister Theresa May claiming that 95% of a UK-EU Brexit deal had been agreed did little to influence the Euro to Pound (EUR/GBP) exchange rate when markets opened on Monday.
However, the Euro (EUR) was unable to benefit from Sterling (GBP) weakness either, amid uncertainties about Italy’s latest budget presentation and this week’s upcoming European Central Bank (ECB) policy decision.
EUR/GBP recovered from a low of 0.8755 last week and closed the week at the level of 0.8816. At the time of writing on Monday the pair trended within a tight region near the opening levels.
Euro to Pound exchange rate movement could be limited in the coming days as the pair becomes more correlated to political news again and investors await Eurozone and UK political developments.
Euro (EUR) Exchange Rates Weighed as Italian Budget Faces EU Criticism
At the end of last week, the EU called Italy’s draft budget plan an ‘unprecedented’ breach of its fiscal rules. This weakened the Euro and worsened concerns about tensions between the EU and Italy’s new anti-establishment government.
While Italy’s government has attempted to reassure markets that it has no intention of splitting with the EU and the Euro (EUR), the EU gave the Italy just a few days to explain its breach of rules in the budget.
If Italy does not comply, its budget could be rejected and this could even lead to sanctions.
On top of this, investors are anxious that due to global political uncertainties and a hawkish Federal Reserve, the European Central Bank (ECB) may not be as optimistic as expected in this week’s upcoming policy decision.
According to Jonathen Chan from CMC Markets:
‘The movement of the Euro and British Pound may become increasingly sensitive to geopolitical factors such as Italy’s budget issue and Brexit talk gaining more headline exposure’
Pound (GBP) Exchange Rate Strength Limited by Irish Border Concerns Once Again
Over the weekend, the UK government revealed that UK Prime Minister Theresa May planned to tell MPs that a UK-EU Brexit deal was 95% complete.
May is expected to deliver the comments to MPs on Monday and will attempt to quell opposition from inside her own government by detailing the progress that has been made.
However, markets were generally unimpressed by this supposed progress, as seemingly no progress had been made on the significant longstanding issue of Ireland’s border.
The UK and EU have not been able to reach an agreement on how Northern Ireland, in the UK, and Ireland, in the EU, could maintain a soft border following Brexit.
According to analysts though, investors are unlikely to see the Pound as appealing again until there is more certainty that such deals can actually be reached without collapsing. According to Thu Lan Nguyen from Commerzbank AG:
‘We can only expect larger moves in sterling if we really get an end of the negotiations, and I mean really the end, which is either a signed deal or not,
Even with some kind of agreement on the domestic policy level, the U.K. government then still needs to reach an agreement with the EU27.’
Euro to Pound (EUR/GBP) Exchange Rate to be Driven by Euro This Week
As no major progress is expected to be made on Brexit issues like the Irish border within the next week or so, the Euro to Pound (EUR/GBP) exchange rate is more likely to be driven by Eurozone developments instead.
The EU has requested that Italy clarify its budget plans and explain its breaches of EU fiscal rules.
If Italy softens it position enough to satisfy EU critics, this could take some pressure off the Euro and help the Euro to Pound exchange rate to climb.
However, Italy may not soften its stance which could worsen concerns about tensions between Italy and the EU.
There is also concern that the European Central Bank (ECB) could be a little more dovish than expected about unwinding its aggressive stimulus program.
If the ECB takes a more cautious tone about ending its stimulus scheme during this week’s policy decision, the Euro’s potential for gains will be limited.
Upcoming Eurozone data could be fairly influential, with Eurozone PMI projections for October due on Wednesday and German and French confidence data towards the end of the week.
Overall though, the Euro to Pound (EUR/GBP) exchange rate is most likely to be driven by political developments this week.