Ahead of the weekend the Pound has somewhat stabilised, keeping the Euro to Pound exchange rate on a narrow trend in spite of worries over the UK’s future outside the EU continuing to mount.
- European Council President warns hard Brexit or no Brexit – Pound remained on muted form as investor jitters persisted
- Higher odds of Fed interest rate hike expected to weigh on Euro – Hawkish Yellen comments could prompt EUR GBP exchange rate downtrend
- No change forecast for finalised Eurozone CPI results – Euro expected to find support on resilient domestic data
- UK Inflation data in focus – Rising inflationary pressure expected to exacerbate Sterling weakness
With the appeal of the Euro generally limited by the more bullish mood of markets and Fed rate hike speculation the EUR GBP exchange rate has struggled to make any particular gains.
Increased Market Risk Appetite Hampered Euro (EUR) Demand
With expectations low for August’s Eurozone trade balance data, the Euro (EUR) remained on a weaker footing on Friday morning. As the chances of the European Central Bank (ECB) opting to taper its quantitative easing program in the near future have seemed to diminish, the appeal of the single currency has softened. Stronger-than-expected Chinese data has also provoked an increase in market risk appetite, prompting investors to favour higher-yielding assets over the muted Euro.
Confidence in the Pound (GBP) has remained similarly limited, with European Council President Donald Tusk commenting that the UK will either face hard Brexit or no Brexit at all. This did not improve the mood of investors, undoing some of the recovery prompted by the government’s concession of a Parliamentary debate on its negotiating terms. However, with Tesco and Unilever having rapidly resolved their differences over a wholesale price increase the Euro to Pound (EUR GBP) exchange rate was prompted to trend narrowly lower.
Stronger US Dollar Predicted to Weigh on EUR GBP Exchange Rate
There is potential for further Euro volatility ahead of the weekend, with the single currency likely to experience turbulence in response to the latest raft of US data. Advance retail sales, the University of Michigan Confidence Index and commentary from Fed Chair Janet Yellen are all set to move the US Dollar (USD). Should the odds of a December interest rate hike from the Federal Reserve be seen to increase, particularly in response to any more hawkish commentary from Yellen, then the Euro is expected to slump further.
Monday’s Eurozone Consumer Price Index results could offer the EUR GBP exchange rate a rallying point, however, if domestic inflationary pressure is confirmed to have ticked higher. A steady improvement in the inflationary outlook of the currency union should encourage greater demand for the single currency, giving the ECB less reason to remain on an easing bias. On the other hand, if the finalised data does not prove encouraging the Euro could stand to extend its recent trend lower.
Pound (GBP) Weakness Forecast to Persist on Hard Brexit Fears and Rising Inflation
On the other hand, the outlook for Sterling remains decidedly weak. With the prospect of a hard Brexit continuing to crystallise and spook investors, researchers at BNP Paribas note:
‘The currency market is now pricing a worst case scenario for capital flows in the coming year. Our BNP Paribas positioning framework suggests short positioning in GBP is getting increasingly stretched. However, as we have noted, we are heading into crunch time for the GBP as the various parties stake out negotiating positions, so we would expect news flow to remain rather challenging in the near-term.’
Positive domestic data is not predicted to have any substantial impact on the softened currency in the near term, although the Pound could still experience some limited support from any stronger showings. However, markets are likely to react strongly to Tuesday’s UK inflation data, which is forecast to point towards September seeing a further rise in inflation. This could encourage investors to continue selling out of Sterling, given that the Bank of England (BoE) is likely to keep monetary policy loose for the foreseeable future and could allow inflation to overshoot the 2% target.
Current Interbank Exchange Rates
At the time of writing, the Euro to Pound (EUR GBP) exchange rate was trending narrowly at 0.90, while the Pound to Euro (GBP EUR) pairing was holding steady in the region of 1.10.