The mood towards the Euro was muted at the start of the week by domestic political worries, particularly as the latest German data failed to impress investors.
- German construction and retail sectors lost momentum in January – Confidence in robustness of Eurozone’s powerhouse diminished
- Pound recovered ground after discouraging UK services PMI – Negative impact of Brexit maintained downside bias
- Draghi comments in focus for Euro – Dovish tone could extend EUR GBP exchange rate losses
- Nationwide house price index forecast to dent Sterling – Weaker showing could point towards diminished consumer confidence
Brexit jitters have continued to weigh on the Pound in recent days, with further weakness possible in response to developments in Parliament this week.
Euro (EUR) Trended Lower on Weak German Construction and Retail Data
Ahead of the weekend the Pound (GBP) slumped sharply, weighed down by resurgent worries over the issue of Brexit. Investors were not encouraged to find that the UK services PMI had weakened further than forecast in January, particularly as the report offered further evidence of the rapid pick up in domestic inflationary pressure. This exacerbated worries over the negative impact of the Brexit vote, particularly as surveys from Ipsos Mori and the British Chambers of Commerce proved bearish in tone.
However, the appeal of the Euro (EUR) weakened on Monday morning in the wake of disappointing German retail and construction PMIs. Both measures showed a significant loss of momentum on the month, with the retail sector showing extremely limited growth in January. As Philip Leake, economist at IHS Markit, noted:
‘Germany’s retail sector was close to stagnation in January, after having rebounded at the end of 2016. Sales rose only slightly month-on-month, while falling on an annual basis for the first time since October 2014. Both employment and purchasing activity also increased only modestly. Worryingly, firms are simultaneously under pressure to reduce costs – the squeeze on gross margins intensified in January amid sharp purchase price inflation.’
This was seen to diminish the odds of the European Central Bank (ECB) adopting a more hawkish view on monetary policy in the near future, putting renewed downside pressure on the EUR GBP exchange rate.
Dovish Draghi Comments Could Extend EUR GBP Downtrend
Volatility is likely for EUR exchange rates as ECB President Mario Draghi will address the European Parliament on Monday afternoon, with scrutiny of the central bank’s policy outlook expected to ensue. If Draghi continues to dismiss calls for the ECB to begin tapering its quantitative easing program the single currency could cede further ground to its rivals, with signs continuing to point towards policy remaining loose for longer.
Political developments are also expected to influence the EUR GBP exchange rate in the near term. With the deadlock between Greece and its creditors back in the spotlight concerns over the future of the Eurozone have been somewhat reignited, as a continued failure to resolve the bailout review could spark a fresh crisis when debt repayment deadlines approach. Events in France could equally weigh on the appeal of the Euro, with markets likely to be discouraged by any signs that the far-right Presidential candidate Marine le Pen’s campaign is gaining momentum.
Weaker House Price Data Forecast to Weigh on Pound Sterling (GBP)
Confidence in the health of the UK economy could weaken further if the Halifax house price index for January points towards a softening in the domestic housing market. Prices are expected to have stalled on the month after a 1.7% increase in December, which could encourage investors to sell out of the Pound again. Any slowing could indicate a general loss in confidence amongst buyers, with any deterioration likely to continue once higher inflation begins to eat into the spending and borrowing power of consumers.
Brexit developments may offer support to the EUR GBP exchange rate, with the Article 50 bill expected to continue its progress through Parliament. If signs continue to point towards a harder form of Brexit or a smaller degree of parliamentary oversight for the negotiation process then Sterling could suffer further softening. Even so, any narrowing of the UK visible trade deficit could see the Pound strengthen later in the week.
Current Interbank EUR, GBP Exchange Rates
At the time of writing, the Euro Pound (EUR GBP) exchange rate was slumped in the region of 0.86, while the Pound Euro (GBP EUR) pairing was making gains around 1.16.