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Euro Exchange Rates Weaken vs Pound, Dollar as Worries over Italian Banking Sector Mount

With the future of the Italian banking sector appearing to hang in the balance ahead of Sunday’s constitutional referendum Euro exchange rates have remained under pressure from market jitters.

  • Higher odds of defeat for Italian PM Renzi limited Euro demand – Markets nervous over prospect of fresh political turmoil
  • Solid UK mortgage figure dented EUR GBP exchange rate – Domestic housing market remained immune to Brexit-based worries
  • US economy continued to demonstrate signs of robustness – Expectations of imminent Fed tightening kept US Dollar on stronger footing
  • Third quarter US GDP expected to weigh on EUR USD exchange rate – ‘Greenback’ set to extend bullish outlook

Despite continued uncertainty over the UK government’s position on Brexit the Pound strengthened on Tuesday morning, with the US Dollar also continuing its bullish run.

Italian Referendum Jitters Limited Euro (EUR) Exchange Rate Strength

Confidence in the Euro (EUR) has remained fragile as anticipation mounts over Sunday’s Italian constitutional referendum. Signs continue to point towards Prime Minister Matteo Renzi suffering a defeat in his pursuit of reforms to the power of the Senate, something which would likely prompt Renzi to resign his post. This would not encourage optimism in the outlook of the Italian banking sector, which could be thrown into fresh chaos if Renzi’s plans to recapitalise struggling banks are consequently shelved.

Even so, the appeal of the single currency could potentially be boosted by November’s German Consumer Price Index. Should inflationary pressure within the Eurozone’s powerhouse economy be shown to have remained solid in the last month then EUR exchange rates could experience some renewed upside pressure. However, if inflation fails to show continued progress towards the target range of the European Central Bank (ECB) then the Euro could extend its downtrend further.

Pound (GBP) Exchange Rates Boosted by Resilient UK Housing Market

Despite speculation that the UK government is not looking to maintain membership of the single market in its Brexit negotiations the mood towards the Pound (GBP) remained positive on Tuesday morning. As October’s UK mortgage approvals figure strongly bettered forecast, rising from 62,930 to 67,520, this suggested that the domestic housing market remains in a resilient state. This positive data helped to overshadow the ongoing concerns over the UK’s future outside of the EU, shoring up Sterling.

The Euro Pound (EUR GBP) exchange rate is likely to see volatility in response to the Bank of England’s (BoE) latest Financial Stability Report. Should this point towards an increased level of post-referendum uncertainty or highlight greater Brexit-based risk then the appeal of the Pound is expected to weaken further. Nevertheless, given the recent softness of Sterling investors may not be deterred for long even in the event of a bearish report, with more buying of the Pound’s lows likely.

Strong Third Quarter US GDP Forecast to Maintain EUR USD Exchange Rate Downtrend

A better-than-expected Dallas Fed Manufacturing Activity Index offered fresh support to the US Dollar (USD) at the start of the week. Markets were encouraged by this latest sign of strength within the world’s largest economy, which helped to keep hopes of an imminent Federal Reserve interest rate hike high. As the Organisation for Economic Co-operation and Development (OECD) gave its backing to Donald Trump’s plans to increase infrastructure spending investors were encouraged to pile into the ‘Greenback’, despite fresh warnings over the likely negative impact of increased protectionist rhetoric.

The third quarter US Gross Domestic Product report could see the Euro US Dollar (EUR USD) exchange rate trend lower, providing that growth is shown to have remained robust. With markets having already priced in the impact of a December interest rate hike any positive data would maintain the positive outlook of the US Dollar. As researchers at ING noted:

‘The narrowing of the equity risk premium in recent weeks suggests a positive shift in US (and global) growth expectations and signs of healthy economic activity (a positive 3Q GDP revision, ISM manufacturing and housing market data) would justify this belief. Offsetting this, however, may be a tapering of inflation expectations; we expect a statistical quirk to result in a softer wage growth pickup in Friday’s US jobs report and this may see US yields retreat from their recent highs.’

Current Interbank Exchange Rates

At the time of writing, the Euro Pound (EUR GBP) exchange rate was slumped around 0.85, while the Euro US Dollar (EUR USD) pairing was trending lower in the region of 1.06.