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GBP EUR Exchange Rate Slips on Fears of ‘Brexit Breakdown’

  • GBP EUR Exchange Rate at 1.12 – Comfortably above last week’s 1.11 lows
  • Could Brexit Negotiations See Progress? – Plus Catalonia concerns weigh on Euro
  • GBP Forecast: UK Inflation in Focus – Could UK CPI influence BoE rate hike bets?
  • EUR Forecast: Eurozone Inflation Due – Catalonia developments could prove more influential

Investors hoping for developments in the Brexit process briefly bought the GBP EUR exchange rate during Monday trade. However, news that Britain was £490b poorer than previously expected, as well as other Brexit uncertainties, left Pound gains limited, so the pair fell back.

GBP EUR advanced from 1.1137 to 1.1238 last week. After briefly touching a high of 1.1285 on Monday, the pair slipped and trended nearer the week’s opening levels again.

Pound (GBP) Gains Limited by Brexit Uncertainties

Sterling has been volatile in recent weeks as Brexit concerns have once again dominated UK headlines.

As the Brexit process has remained stuck in a ‘deadlock’ for most of the past month, investors have been hoping for signs of progress from UK and EU negotiators.

This meant the Pound advanced last Friday and on Monday morning. Friday saw EU chief negotiator Michel Barnier hint that the EU was willing to help give Britain a post-Brexit transitional period. Barnier also hinted that the EU was already making plans for preliminary trade talks.

Then, on Monday, UK Prime Minister Theresa May flew to Brussels to meet with EU officials in the hopes of making some progress into breaking the ‘deadlock’.

However, in the afternoon investors were spooked by a report from Bloomberg, which cited a source familiar with the UK government’s Brexit negotiation position.

According to the report;

‘Without a clear sign that negotiations will progress to trade and transition arrangements by December at this week’s summit of European leaders, the entire Brexit process will be in danger of collapse — and senior British ministers are losing faith in the EU’s willingness to strike a deal, the person said.’

Markets are highly concerned that this could mean UK negotiators will walk away without a deal, leading to a ‘hard Brexit’. This led to a selloff in the Pound, according to Neil Jones from Mizuho;

‘(The move) is squarely on that phrase, ‘Brexit breakdown’,

The correlation is still there – any suggestion of a harder Brexit is generating significant Sterling selling.’

On top of this, a revised report from the Office for National Statistics (ONS) revealed that Britain was £490b poorer than thought, which also put pressure on Sterling.

Euro (EUR) Weighed on by Catalonia Jitters Once Again

Concerns that tensions between Catalonia and Spain could surge again weighed on Euro demand on Monday, as Catalonian President Carles Puigdemont remained vague on whether or not he intended to declare independence.

The Spanish government had given Catalonia’s government an ultimatum and asked it to clarify whether it intended to declare independence.

However, Carles Puigdemont merely sent Spanish Prime Minister Mariano Rajoy a vague letter which claimed Catalonia now had a democratic mandate for independence and asked for face-to-face negotiations with Rajoy.

Rajoy responded later in the day, indicating that Puigdemont’s letter had been unsatisfactory and that the Spanish government was edging closer towards the potential activation of ‘Article 155’, which would give Spain legal control over Catalonia.

If Spain did take control over Catalonia, there would likely be clashes between the two as separatists take to the streets.

Anxiety about tensions rising between Spain and Catalonia again before things get better left the Euro unappealing.

On top of this, investors were also disappointed with the Eurozone’s August trade surplus, which unexpectedly dropped to €16.1b.

The drop in the Eurozone’s surplus was due to the strong Euro affecting the price and appeal of Eurozone exports, as well as an increase in imports.

GBP EUR Exchange Rate Forecast: Inflation Results Due Today

Key Consumer Price Index (CPI) results from both the UK and Eurozone will come in today and could have an influence on central bank speculation.

Britain’s September inflation rate is forecast to have improved to 3% year-on-year, so if it meets or beats expectations the Bank of England (BoE) is likely to be under even more pressure to tighten monetary policy within the coming months.

The Eurozone’s September inflation results are comparatively unlikely to be hugely influential, unless they surprise investors.

If Eurozone inflation comes in well above expectations, it could boost hopes that the European Central Bank (ECB) could tighten Eurozone monetary policy beyond quantitative easing (QE) within the foreseeable future.

On the other hand, poor Eurozone inflation could cause concerns that Eurozone inflation is still too subdued and that some QE may need to remain in place for longer than hoped.

Tuesday will also see the publication of ZEW’s October economic sentiment survey results for Germany and the Eurozone.

Of course, political developments could influence Pound and Euro movement too. If there are any Brexit developments or if tensions rise between Spain and Catalonia, the GBP EUR exchange rate could strengthen.