Pound to Euro Exchange Rate Rally Slows After Touching May Highs
While Sterling (GBP) demand has not been particularly broad, the Pound to Euro (GBP/EUR) exchange rate advanced last week amid weakness in the Euro (EUR). Concerns about Italian politics finally impacted markets, leaving the shared currency unappealing.
Due to political concerns and underwhelming Eurozone inflation, GBP/EUR surged from 1.1336 to 1.1438 last week and trended near that level on Monday morning. GBP/EUR briefly touched on a high of 1.1471 on Friday – its best levels since April.
Sterling was able to take advantage of the Euro’s weakness, as speculation that Britain could remain in an EU customs union following Brexit left the British currency slightly more appealing.
Could the GBP/EUR rally continue? That depends on upcoming data and political developments.
The coming days will see the publication of many key UK ecostats including inflation and growth. Of course, any developments or surprises regarding the Brexit process or Italy’s leadership could also have an impact on GBP/EUR.
Pound (GBP) Exchange Rates Holds Gains Following Customs Union Speculation
Last week saw the Brexit process hit headlines again and they once again proved how much sway the process has over Pound Sterling.
Demand for the Pound rose amid reports that the UK government was considering to remain in an EU customs union post-Brexit or join a new one.
Sterling remained strong versus a weak Euro later in the week, when other reports indicated that the UK government’s cabinet had agreed to a ‘backstop’ approach to the customs union, to use in the event that it cannot agree on a more bespoke deal.
While the report was not confirmed and UK Prime Minister Theresa May played down the possibility of Britain remaining in a customs union post-Brexit, the Pound to Euro (GBP/EUR) exchange rate still climbed.
Last week’s UK data supported Sterling too, but only slightly. The Pound became a little more appealing on news that Britain’s wage growth was trending just slightly above domestic inflation.
Euro (EUR) Exchange Rates Unappealing as Italian Political Uncertainty Grips Traders
Demand for the Euro has weakened over the past week, as Eurozone inflation has failed to impress investors and Italy looks increasingly likely to see populist leadership.
Markets are concerned about a likely coalition between Italy’s League party and 5-Star Movement party.
Both populist parties have had a history of Eurosceptic views. So while they are not currently campaigning on anti-Eurozone rhetoric, investors fear that this could change while the coalition is in power.
As Italy is one of the major Eurozone nations, even the possibility that the nation could head towards becoming more Eurosceptic has left the shared currency less appealing.
According to Viraj Patel, currency strategist at ING Bank:
‘But with political risks bubbling again, we now see a higher bar for Eurozone data to positively drive the currency in the short term’
Pound to Euro (GBP/EUR) Forecast: Political News and UK Ecostats in Focus
With last week’s Pound to Euro (GBP/EUR) exchange rate movement focused largely on political news, the pair is likely to react to any fresh political developments this week too.
For example, if the UK government’s Brexit stance looks to be softening this would likely make Sterling more appealing.
Meanwhile, if the likely new Italian coalition confirms its coalition plans and begins to put together a government, investors will be keeping a close eye on the coalition government’s stances on the Eurozone.
If the new government is perceived as notably anti-Euro, the Euro could remain weak even if upcoming Eurozone data impresses.
Wednesday through Friday will see the publication of some influential ecostats from Britain and the Eurozone. The most influential report could be Wednesday’s UK inflation report.
Eurozone PMI projections for May and consumer confidence projections will be published on Wednesday too, followed on Thursday by UK retail sales and on Friday by UK growth projection updates.
If the upcoming UK stats are stronger than expected, it could boost market speculation that Britain’s economy is becoming more resilient again despite poor performance in Q1 and April. This would help the Pound to Euro (GBP/EUR) exchange rate to continue rallying.