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Pound Euro Exchange Rate Trends Lower as Brexit Tensions Rise over Northern Ireland’s Border

Resurgence in Brexit-Based Anxiety Fuels Pound Euro Exchange Rate Losses

The Pound to Euro (GBP/EUR) exchange rate slumped sharply in response to the EU’s decision to pursue legal action against the UK over the Northern Ireland protocol.

With Brexit tensions on the rise once again, especially in the face of existing border disruption, the mood towards Pound Sterling (GBP) naturally soured.

In the absence of any fresh positive data developments the risk of renewed Brexit-based risks left GBP exchange rates biased to the downside on Tuesday.

As elements of the final deal are still yet to be settled, notably the future of financial services, this move cast a deep shadow over the UK outlook.

With optimism over the progress of the Covid-19 vaccination rollout also fading there was little to prevent the Pound from slipping lower across the board.

Strengthening German Economic Sentiment Shores up Euro Exchange Rates

Demand for the Euro (EUR), on the other hand, strengthened in the wake of a better-than-expected Germany ZEW economic sentiment index.

While forecasts had pointed towards the index improving solidly from 71.2 to 74 the ultimate jump to 76.6 gave investors encouragement.

This suggests that the Eurozone’s powerhouse economy continued to recover its lost momentum over the course of the first quarter, reducing fears of a potential negative quarterly growth rate.

The prospect of a stronger period of growth for the German economy helped to shore up EUR exchange rates, even as the current conditions index remained negative.

As the accompanying Eurozone economic sentiment index also showed a solid increase on the month the appeal of the single currency grew further.

Pound Euro Exchange Rate Forecast to Benefit from Narrowed Eurozone Trade Surplus

Comments from European Central Bank (ECB) policymakers could put some pressure on the Euro in the days ahead, though.

If policymakers continue to express concern over the relative strength of the Eurozone economy this could see the Pound to Euro exchange rate recovering some of its lost ground.

A sharp narrowing of January’s Eurozone trade surplus may equally put pressure on the single currency in the near term.

Evidence that trade conditions deteriorated at the start of 2021 would offer fresh cause for doubt in the health of the Eurozone economy, with weaker trade likely to diminish growth potential in the first quarter.

However, a greater source of volatility is likely to come on the back of the Bank of England’s (BoE) March interest rate decision.

Even though no change in monetary policy is anticipated at this stage signs of increased anxiety among policymakers could expose the Pound to fresh selling pressure.

Unless the BoE expresses a degree of confidence in the health of the UK economic outlook the Pound to Euro exchange rate may well remain on the back foot.