- Euro Pound Exchange Rate Reaches 0.88 – Hits multi-month-high on Monday
- Uncertainty Weighs on Pound – UK government and Brexit outlooks unclear
- Eurozone Economic Sentiment Mixed – Eurozone sentiment rises, German sentiment drops
- GBP Forecast: Political Developments in Focus – Bank of England meeting could also influence Pound
Euro Pound Edges Higher on Wednesday
Sterling continued to weaken on Wednesday afternoon as investors digested the day’s UK wage growth results. EUR GBP continued to trend above the level of 0.88.
The Bank of England (BoE) may take a dovish tone in Thursday’s policy decision, which could weaken the Pound even further.
Wednesday’s Eurozone data included German inflation, which slowed as expected, as well as industrial production and employment stats from the Eurozone.
Q1 employment change figures beat expectations, rising from 1.4% to 1.5% year-on-year and coming in at 0.4% quarter-on-quarter.
Euro demand was also bolstered by US Dollar weakness on Wednesday afternoon.
[Previously updated 12:42 BST 14/06/2017]
The Euro Pound exchange rate strengthened slightly on Wednesday morning as Britain’s April wage growth results made traders more concerned about a UK ‘pay squeeze’.
Britain’s unemployment rate came in at 4.6% as expected in April, but average earnings unexpectedly dropped.
Wages excluding bonuses were expected to come in at 2% but instead dropped to 1.7%. The previous wages figure was even revised lower, from 2.1% to 1.8%.
As UK inflation continues to surge and wage growth continues to slow, analysts expect UK consumers will have an increasingly difficult time spending comfortably on the high street.
Britain’s economy is a heavily consumer-based one, meaning UK economic growth could slow later this year as consumers rein in spending.
[Previously updated 16:37 BST 13/06/2017]
UK Inflation Knocks Euro Pound from Highs
Tuesday’s UK inflation results were initially brushed over, but this as well as ZEW’s latest economic sentiment survey knocked the Euro Pound exchange rate down slightly from its multi-month highs.
EUR GBP trended near the level of 0.88 for most of the day but briefly dropped to 0.87 on occasion.
Britain’s inflation rose quicker than expected, coming in at 2.9% year-on-year in May despite being forecast to remain at 2.7%. Monthly inflation dropped from 0.5% to 0.3% rather than to 0.2% as expected.
This news was enough to spark market speculation that the Bank of England (BoE) could be pressured into tightening UK monetary policy.
This is despite the BoE’s indication in recent months that it will not be pressured into acting even if UK inflation nears 3%.
[Previously updated 12:58 BST 13/06/2017]
As Tuesday’s Eurozone data was mixed and UK inflation stats beat expectations, the Euro Pound exchange rate recovered slightly from its worst levels on Tuesday morning.
After hitting a multi-month-high of 0.8863 on Monday evening due to UK political uncertainty, the pair slipped. On Tuesday the EUR GBP trended near the level of 0.88.
ZEW published its June economic sentiment surveys for Germany and the Eurozone. Germany’s current conditions figure improved to 88 but economic sentiment unexpectedly dropped to 18.6. The Eurozone’s overall economic sentiment figure beat expectations with a result of 37.7 however.
[Published 06:00 BST 13/06/2017]
The Euro Pound exchange rate advanced on Monday as investors reacted to the weekend’s UK political developments as well as speculation that Brexit negotiations could be delayed as the new minority government attempts to establish itself.
EUR GBP advanced slightly from 0.8752 to 0.8785 last week as the Euro recovered from a European Central Bank (ECB) related selloff. On Monday, EUR GBP briefly hit a high of 0.8860, the pair’s best level since November 2016.
Euro (EUR) Boosted by French Legislative Election Hopes
The Euro weakened towards the end of last week after the European Central Bank (ECB) confirmed it was cutting its Eurozone inflation forecasts through 2019.
Amid expectations of weaker inflation, investors doubted the ECB would be pressured into tightening Eurozone monetary policy within the foreseeable future.
The shared currency saw an increase in demand on Monday however, following the results of the first round of France’s legislative elections.
Despite French President Emmanuel Macron’s ‘La République en Marche’ (LREM) party still being just around one year old, the party won 32.32% of the vote. LR won 21.56% and FN won 13.2%.
Projections see Macron’s party winning a huge majority of 415-455 seats in the second round next Sunday.
This news has improved Euro sentiment, as investors had previously been concerned that Macron would have trouble strengthening France’s position in the Eurozone without an influential party behind him.
There was a downside to the weekend’s news however, as the abstention level for the French legislative vote hit a record high of 51.29%. This indicated that more voters than usual were uninspired by the choices available.
Pound (GBP) Weak Ahead of Brexit Negotiations
Since last week’s UK general election the Pound has been much weaker. Market concerns about the stability of Britain’s government as well as the potential success of Brexit negotiations have risen due to a weaker, minority government.
Brexit negotiations had been scheduled to begin next week, but Monday saw speculation that they may have to be delayed as the new government continues to form.
Investors had expected Britain’s general election to end with a Conservative majority. This would have strengthened the Conservative government as well as UK Prime Minister Theresa May’s position in Brexit negotiations.
However, the Conservatives instead lost seats and the election ended with a ‘hung parliament’. Theresa May is currently aiming to lead a minority Conservative government with informal support from Northern Ireland’s Democratic Unionist Party (DUP).
Theresa May called the general election in order to increase her party’s majority and the election result backfired on her. Critics, both opponents and Conservative backbenchers, have argued that May is unlikely to remain in power for much longer as a result.
Speculation is rising that May will step down over the next year and some analysts also speculate that there will be yet another general election in the coming year or so.
Amid rising uncertainty about the future of the government, the Prime Minister, and Brexit negotiations, the Pound has been highly unappealing since last week.
Euro Pound Forecast: Pound Investors May Overlook Data
With UK political uncertainty persistently high, the Pound is unlikely to see a strong performance in the coming week.
Tuesday will see the publication of Britain’s May Consumer Price Index (CPI) results. These would typically be highly influential stats, but even if they impress concerns about government’s strength going forward could weigh on any optimism.
Similarly, Wednesday’s UK employment results and Thursday’s May retail sales report may not have as strong an effect as usual on Pound trade.
Pound investors may still react to the Bank of England’s (BoE) June monetary policy decision this week if it surprises however.
The bank is expected to leave monetary policy frozen and is unlikely to be at all hawkish amid political and economic uncertainty. A more dovish than expected stance, on the other hand, could definitely weaken the Pound.
The Euro is still likely to react to this week’s Eurozone data. ZEW will publish its June economic sentiment surveys on Tuesday, Germany’s final May inflation stats will be published on Wednesday and the Eurozone’s final May inflation results will come in on Friday.
Pound weakness is likely to keep the Euro Pound exchange rate sturdy for most of the week, but if Eurozone data disappoints the pair’s strength will be limited.