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GBP EUR Exchange Rate Claws Back Losses on Eurozone Uncertainty

  • GBP EUR Exchange Rate Hits Two-Month-High – Pair trends above 1.13 again
  • German Election Result Concerns Markets – Merkel’s CDU party underperforms
  • GBP Forecast: Carney Speech on Thursday – UK growth stats on Friday
  • EUR Forecast: German Coalition Talks in Focus – Eurozone inflation later in the week

The GBP EUR exchange rate jumped on Monday, as investor Brexit jitters cooled again and markets were instead more concerned about the results of Germany’s 2017 federal election. German Chancellor Angela Merkel won a fourth term as expected, but with a much smaller win than expected.

GBP EUR plunged last week, from 1.1376 to 1.1293 amid fresh concerns about the Brexit process. However, on Monday the pair briefly touched on a two-month-high of 1.1394 and trended above the level of 1.13 again.

Pound (GBP) Firms on Hopes of Brexit Progress

Despite tumbling last Friday due to Brexit concerns, investors bought the Pound again on Monday amid hopes that UK Prime Minister Theresa May’s Brexit speech may actually have helped the process to progress.

While many investors had initially been concerned that the Prime Minister’s Brexit speech had once again hinted at the possibility of a ‘hard Brexit’, markets cooled when it appeared the speech may indeed have helped to break a UK-EU negotiations deadlock.

EU chief negotiator Michel Barnier said May’s speech ‘expressed a constructive spirit’, slightly improving the mood in markets. He went on to say;

‘The speech shows a willingness to move forward, as time is of the essence.

We need to reach an agreement by autumn 2018 on the conditions of the United Kingdom’s orderly withdrawal from the European Union.’

With markets hoping that UK-EU negotiations would make better progress as the fourth round of talks begins, Pound investors have largely brushed over the other concerning news from recent sessions.

Credit rating agency Moody’s announced that it was downgrading Britain’s credit rating from Aa1 to Aa2, citing Brexit uncertainties.

As the other major agencies, Fitch and S&P, had already cut their UK credit ratings in 2016, this had little effect on the Pound.

Euro (EUR) Slides on Merkel’s Underwhelming Victory

German Chancellor Angela Merkel won her fourth term in power on Sunday, as was widely expected.

However, as Merkel’s Christian Democratic Union (CDU) party saw only 33% of the vote, its worst result since 1949, markets were spooked. The Social Democratic Party of Germany (SDP) won 20.5% of the vote.

The far-right nationalist party, Alternative für Deutschland (AfD), won 13% of the vote, making it the first time in over 50 years that a nationalist party has won seats in the Bundestag.

Merkel is now under pressure to negotiate a coalition and form a government that can effectively oppose the AfD.

Analysts, such as Lee Wild from Interactive Investor, believe the idea of coalition talks is causing market uncertainty after months of a more appealing Euro. He stated;

‘Any extended period of uncertainty poses a problem, certainly if the FDP’s dislike of Macron threatens Germany’s relationship with France. Markets won’t like that.

It’s possible that Angela Merkel becomes distracted from international politics during the inevitable horse trading following a disappointing election for her. Any sense that this weakens the EU’s position could play into the hands of UK Brexit negotiators, as a fourth round of talks with European officials begins.’

Other analysts believe German coalition talks may not prove the biggest threat to the Euro. For example, Kathleen Brooks from City Index believes that a proposed independence referendum from Catalonia could threaten the shared currency;

‘Overall, referendums in recent years have not been good news for a currency…

If the Catalonia referendum goes ahead we expect this to be a disruptive event for the Euro, with the potential for a sharp decline of up to 5% initially in the single currency if the separatists win.’

On top of this, the Euro was also held back by the cautious tone of European Central Bank (ECB) President Mario Draghi, who indicated in a Monday speech that monetary stimulus was still needed.

GBP EUR Exchange Rate Forecast: Political Developments in Focus

In the coming days, local economic data is unlikely to have a notable impact on Pound or Euro exchange rates.

Tuesday will see the publication of Britain’s BBA mortgage approvals data from August, as well as France’s August jobseekers report and September business confidence.

Markets are more likely to pay close attention to any potential developments in Brexit negotiations and German coalition talks.

If UK-EU Brexit talks appear more productive this week, the Pound could strengthen as investors become a bit more optimistic about the process.

However, the Euro could strengthen too if German Chancellor Merkel’s coalition talks progress smoothly.

The GBP EUR exchange rate movement is likely to see bigger movement towards the end of the week, as Bank of England (BoE) Governor Mark Carney will hold a speech and Germany’s preliminary September inflation report will be published.