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Why has Pound Euro Held Most Gains despite Solid Eurozone Economic News?

Demand for the Pound to Euro exchange rate increased again slightly on Thursday afternoon, allowing the pair to remain comfortably above the level of 1.18 for the third consecutive day.

The day’s solid Eurozone ecostats were once again not enough to hold back the Pound’s advances.

Germany’s final Q4 Gross Domestic Product (GDP) met expectations when they were published on Thursday morning. This meant that Germany’s overall 2016 growth had come in at 1.9% – making Germany the best performing major economy of last year.

However, GfK’s latest survey indicated that German consumer confidence unexpectedly slipped from 10.2 to 10 in the March outlook.

This as well as ongoing French political concerns prevented GBP EUR from falling on Thursday morning.

[Previously updated 16:24 GMT 22/02/2017]

The Pound Euro exchange rate eventually slipped on Wednesday afternoon, but still remained above the key level of 1.18 despite this week’s optimistic Eurozone ecostats.

Wednesday’s figures included Ifo’s German business sentiment surveys from February. Business climate unexpectedly rose from 109.9 to 111, expectations from 103.2 to 104 and current conditions from 116.9 to 118.4.

Italy’s final January Consumer Price Index (CPI) results also beat expectations. Yearly inflation came in at 1% while monthly inflation only slipped from 0.4% to 0.3% despite being predicted to fall to 0.2%.

The Eurozone could see further optimistic data published on Thursday in the form of Germany’s final Q4 Gross Domestic Product (GDP) results.

However, if they disappoint the Pound to Euro could extend its weekly gains despite a lack of influential British data coming out for the rest of the week.

[Previously updated 12:48 GMT 22/02/2017]

While the Eurozone has continued to see impressive ecostats this week, the Pound to Euro exchange rate held its ground near highs of 1.18 on Wednesday.

Eurozone political concerns persisted during Wednesday’s European session. Concerns remain high that Marine Le Pen could win this year’s France Presidential election and withdraw the Eurozone’s second biggest economy from the currency bloc.

After 2016’s unexpected Brexit and Trump votes, investors appear to be taking less chances despite polls indicating Le Pen would lose the second round of the election.

As a result of these ongoing political fears, GBP EUR only saw modest losses on Wednesday morning despite Britain’s Q4 2016 Gross Domestic Product (GDP) figure being revised down to 2% year-0n-year.

[Published 06:00 GMT 22/02/2017]

The Pound to Euro exchange rate advanced once more on Tuesday. Despite a strong showing from Markit’s February Eurozone PMIs, the shared currency remained jittery on underlying political concerns.

According to the latest opinion polls, nationalist French Presidential candidate Marine Le Pen has advanced in popularity.

Polls from OpinionWay indicate that Le Pen is gaining on her opponents. While she remains a way from being the most popular choice for round two, her would-be opponent, Emmanuel Macron, has seen his advantage halved in just two weeks.

On the increasing appeal of Le Pen, Bruno Jeanbart, director of OpinionWay, stated;

‘It’s all about security. Le Pen is benefiting from the fact that they’re all busy either bickering or unable to disentangle themselves from their many controversies.’

Earlier in the year a deluge of controversies hit Republican Francois Fillon. Fillon was previously considered to be the frontrunner for the election.

Euro traders focused on this rather than Tuesday’s Eurozone PMIs as Marine Le Pen has indicated she wishes to withdraw France from the Eurozone. A key Eurozone nation withdrawing from the bloc is perceived as among the biggest threats to the Euro project.

The most notable preliminary February PMIs from Markit all beat expectations, with the exception of France’s manufacturing PMI, which slowed from 53.6 to 52.3. However, French services beat expectations and rose from 54.1 to 56.7.

All German prints beat projections. Notably, German manufacturing rose from 56.4 to 57, beating the predicted 56. Services rose from 53.4 to 54.4 and the composite print jumped from 54.8 to 56.1, avoiding a slip to 54.7.

Largely due to Germany’s impressive prints, the Eurozone’s overall PMIs came in above expectations too. Manufacturing rose from 55.2 to 55.5 and beat the projected 55. Services rose from 53.7 to 55.6 and beat expectations of 53.7. Lastly, the overall composite print rose from 54.4 to 56 and comfortably beat the predicted 54.3.

This indicated to traders that the Eurozone economy was on track to outperform expectations in February.

However, as well as Eurozone political concerns, the strength of the Pound has also prevented the Euro from benefitting from these optimistic stats.

Britain’s January public sector net borrowing results improved from -£4.24b to £9.82b, marking the nation’s best borrowing surplus for a January since the year 2000.

Amid the impressive borrowing results, analysts suggested the UK government may reach its borrowing deficit targets for the 2016 fiscal year (which ends on the 5th of April) after all. Despite this, the UK Treasury indicated it would remain cautious.

Yael Selfin, chief UK economist from KPMG, believed this was also good news for UK Chancellor Philip Hammond ahead of next month’s spring budget;

‘This gives the chancellor a bit more room for manoeuvre in his final spring budget next month. If the UK economy remains stable over the transition period once article 50 is triggered, Hammond could meet his objective to reduce the budget deficit below 2% GDP by 2020-21, while offering a few small giveaways.

…However, in these uncertain times, the chancellor is likely to hold some ammunition back, in case the economy proves weaker in the run up to UK’s departure from the European Union, so more significant policy announcements are not likely before the autumn budget in November.’

Sterling also continued to benefit from hopes that the House of Lords would amend the Brexit bill and attach conditions for the UK government to follow before it can activate Article 50 in March.

This was the primary reason for the Pound’s appreciation on Monday and it was able to keep those gains throughout Tuesday.

Sterling could also drive GBP EUR movement on Wednesday, as it will see the publication of Britain’s highly anticipated preliminary Q4 Gross Domestic Product (GDP) results.

If they beat expectations it will indicate that Britain’s economy could continue to perform strongly despite slowing retail sales in the services sector.

However, if they come in below expectations concerns are sure to rise that the slowing services sector will hold back UK growth in 2017.

Britain’s retail sales have fallen in recent months as the Pound’s drop in value hits the value of consumer prices and squeezes UK citizens’ finances.

The sector is responsible for a considerable amount of Britain’s GDP. Analysts fear the slowing retail sector could affect overall UK growth in 2017 and beyond.

Other data due for publication on Wednesday includes Ifo’s February German business sentiment surveys. Analysts predict all prints will slip slightly.

January’s final Eurozone Consumer Price Index (CPI) results will also be published on Wednesday and could cause even further weakness in the Euro this week if they disappoint. Poor Eurozone CPI would likely see GBP EUR continue its advance on Wednesday and Thursday.