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Strong German Production Data Fails to Extend Euro Pound Exchange Rate Gains

Although German industrial production surprised to the upside in August this was not enough to keep the Euro on a stronger footing against the Pound.

Even so, the Eurozone’s powerhouse economy is continuing to demonstrate solid signs of strength as industrial output rose by a bullish 2.6% on the month.

Coupled with a better-than-expected Eurozone Sentix investor confidence, this suggests that the outlook for the currency union remains relatively strong in spite of the increased sense of local political uncertainty.

However, with the issue of a potential unilateral declaration of independence from Catalonia still looming the Euro remains vulnerable to downside pressure.

If the future unity of the Eurozone comes increasingly into question the Euro Pound exchange rate is likely to weaken further.

Should Catalan officials deescalate their rhetoric in the coming days, though, this may encourage investors to pile back into the single currency once again.

Germany’s latest raft of trade data will also be in focus on Tuesday, with forecasts pointing towards a modest widening of the surplus in August.

If the trade surplus defies expectations to narrow instead this could weigh heavily on EUR exchange rates, undermining some of the strength of recent German data.

Political Concerns Continue to Dominate Pound Outlook

While speculation over Theresa May’s future and the stability of the current Conservative government remains the Pound was still able to recover some ground on Monday.

A lack of fresh political developments over the weekend offered markets some relief, boosting GBP exchange rates as last week’s heavy losses encouraged fresh investor interest.

However, as Morten Helt, senior analyst at Danske Bank, noted:

‘Brexit negotiations resume today in Brussels and politics (both domestic UK and Brexit) are likely to be the key driver for GBP this week. In an interview with the Sunday Times, May indicated that she could soon be planning to reshuffle the cabinet and there have been unconfirmed media reports on whether Boris Johnson is in the firing line. If Theresa May manages to reassert her authority, it would be positive initially for GBP but is unlikely to have a longer lasting effect on GBP due to the still high Brexit uncertainty.’

Unless markets see signs of the UK and EU negotiating teams moving towards an agreement on key Brexit issues the EUR GBP exchange rate is likely to find support.

Any hardening of UK officials’ rhetoric could weigh heavily on the Pound, stoking fears that a hard exit could still be on the table.

On the other hand, if talks appear to be getting back on track then the mood towards Sterling could improve somewhat, even though there is still a long way to go before Brexit-based uncertainty can be entirely eliminated.

Current EUR GBP Interbank Exchange Rates

At the time of writing, the Euro Pound exchange rate was slumped in the region of 0.8934. Meanwhile, the Pound Euro exchange rate was making strong gains around 1.1192.