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Pound Euro Exchange Rates Fall; UK Consumers Spending Now to Avoid Brexit Price Hikes

Pound Euro exchange rates have been unable to recover any of the morning’s early losses, despite a slight unexpected improvement in UK consumer confidence this month.

  • Pound Euro exchange rates fall – Investors not cheered by improving UK confidence
  • Euro rises on banking bailout hopes – Monte dei Paschi cash call fails
  • Forecast for Pound Euro exchange rates – US data could cause Euro volatility

An end to the Italian banking crisis could be near, undermining Pound Euro exchange rates even though it means a state bailout of the banks.

Pound Euro Exchange Rates Weakened; Survey Reveals Consumers Hold Dovish Economic Outlook

The overall consumer confidence index may have edged higher, but the findings by GfK haven’t been well-received by investors.

One of the things that has given markets hope since the Brexit referendum is that UK consumer spending remained strong – or even accelerated – since the vote to leave the EU. Considering the UK’s services industry was responsible for all of the country’s economic expansion in the last reading, consumer spending is clearly vital.

However, according to the findings of the latest GfK consumer confidence survey, households are spending now because they know prices will go up in the future. This suggests that the pace of spending is set to slow over the coming months as inflation accelerates further and begins to squeeze household incomes.

Joe Stanton, GfK Head of Market Dynamics, explains;

While consumers remain relatively confident about their personal financial situation, confidence in the general economic situation for the UK has collapsed in the face of uncertainty about the future both at home and abroad. Despite everything, consumer resilience is shown by strength in the major purchase index, the ‘now is a good time to buy’ mantra being reflected in strong retail sales growth.

As a result, the sub-indices measuring major purchases and savings have risen, pushing the overall index up one point to -7, but the assessments of personal finances and general economic outlook have both decreased one point.

This has weakened Pound Euro exchange rates.

Euro Pound Exchange Rates Rally; Is the End in Sight for Italy’s Banking Crisis?

Pound Euro exchange rates

In normal circumstances, news that a country’s banks had run out of capital and required the government to step in would be met with extreme negativity on the markets.

However, when a country’s banks have been in crisis for several months now, a state bailout suddenly seems like a welcome intervention. That’s the situation with Italy today, where the world’s oldest bank – Monte dei Paschi (MPS) – is highly likely to need government assistance.

The bank had been given until the end of December to raise €5 billion in capital in order to deal with its huge mountain of bad debts. However, MPS found investors were only willing to stump up less than half of the cash required after a key Qatari investor decided not to contribute €1 billion to the cash call.

This means the bank will need part of the €20 billion rescue package recently approved by the Italian government. This is actually boosting the Euro, for several reasons, including;

  • A collapse in the Italian banking sector could ripple across the Eurozone – state bailout in Italy is preferable to state bailouts across the currency bloc
  • The Italian government has already approved the rescue package, meaning the safety net is already in place for when it is needed
  • MPS will be required to present a new business plan to the government; Parliament is likely to be far more strict on insuring the bank turns itself around than investors

Overall, this is keeping the Euro Pound exchange rate buoyant.

Pound Euro Exchange Rates Forecast to Stay Negative if US Data Slew Disappoints

The day’s UK and Eurozone economic news has already been released, but negative correlation with the US Dollar could cause the Euro to fluctuate.

Early after sees the release of preliminary US durable goods orders, which are forecast to decline -4.5%. This is likely to weaken the US Dollar, potentially further undermining Pound Euro exchange rates.

However, the release of the high-profile personal consumption expenditure figure could reverse that trend if it prints positively; it’s the Federal Reserve’s preferred way to measure inflation, so strong growth here would further cement the odds of monetary tightening next year.

Interbank Pound Euro Exchange Rates

At the time of writing, Pound Euro exchange rates (GBP EUR) were trading around 1.18, while Euro Pound exchange rates (EUR GBP) were trending around 0.84.