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Pound to Euro, US Dollar Exchange Rates Slump as Brexit Worries Continue to Worsen

The strength of Pound exchange rates has continued to fade, with the prospect of a hard Brexit showing signs of deterring international banks from remaining based within the UK.

  • VTB Bank announced scaling down of plans for its UK operations – Brexit-based anxiety kept Pound under pressure
  • Euro boosted as next tranche of Greek bailout funds approved – Worries over future of Eurozone tempered for time being
  • Markets continued to price in odds of 2016 Fed rate hike – Impact of disappointing Non-Farm Payrolls report faded
  • Improved UK house price data could offer GBP exchange rate rallying point – Pound predicted to remain biased to the downside in near term

Although the date of the US presidential election is drawing closer the appeal of the US Dollar has improved, with markets betting that the chances of a Trump victory are diminishing.

Brexit Worries Weighed Heavily on Pound (GBP) Despite Positive UK Data

Weakness remains the dominant outlook for the Pound (GBP) this week, following the news that the Russian VTB Bank is scaling down its plans for its London office. This is the first substantial sign that international financial institutions are being deterred by the prospect of Brexit, suggesting that the City could see further withdrawals once exit proceedings are underway. Although the BRC Like-For-Like Sales report pointed to a strong recovery in consumer demand in September this was overshadowed, as sentiment remains generally divorced from domestic data developments.

Worries over the prospect of a hard Brexit are likely to continue weighing on Sterling throughout the coming days, with little expected to distract investors from their growing concerns. Any further developments relating to the future of the UK’s relationship with the EU could trigger greater GBP exchange rate volatility, with a sustained stabilisation seeming unlikely in the near future. Thursday’s RICS House Price Balance could offer some measure of support to the Pound, although signs of strength in the housing market may prove limited encouragement to spooked investors.

GBP EUR Exchange Rate Predicted to Weaken Further on Bullish ZEW Sentiment Surveys

There was some relief for the Euro (EUR) after Monday’s meeting of Eurozone finance ministers saw the approval of the latest tranche of bailout funds for Greece. As there had been some concern over Athens’ progress on creditor-mandated reforms this announcement prompted an increase in demand for the single currency. With the resilience of the currency union assured, at least for the time being, and the latest German trade data proving positive the Pound to Euro (GBP EUR) exchange rate was pushed lower.

Expectations are also high for October’s German and Eurozone ZEW Economic Sentiment Surveys, which are expected to show a solid uptick in domestic confidence. As researchers at Danske Bank note:

‘Yesterday, Sentix investor confidence surprised on the upside and we believe we could see the same picture for ZEW expectations as it should be supported by the general state of the economy, which remains solid as reflected in the resilient PMIs and the strong Ifo business expectations in Germany.’

Should the Eurozone’s powerhouse economy continue to demonstrate signs of robustness then the GPB EUR exchange rate is expected to weaken further, although US Dollar (USD) strength could limit the gains of the Euro.

Odds of 2016 Fed Rate Hike Continued to Boost US Dollar (USD) as Election Unease Diminishes

Even though US markets were closed at the start of the week this didn’t prevent the ‘Greenback’ from trending higher across the board. In large part this was a recovery of the losses seen on the back of Friday’s disappointing Non-Farm Payrolls report, with markets still betting on the chances of the Federal Reserve raising interest rates before the end of the year. As a result, the Pound to US Dollar (GBP USD) exchange rate returned to a downtrend, even if it remained above the 31-year low seen during the flash crash.

With the likelihood of a Donald Trump presidency seeming to be weakening investors have been encouraged to pile back into the US Dollar, particularly with the appeal of higher-yielding assets limited. This confidence could be boosted by September’s NFIB Small Business Optimism and Labour Market Conditions Indexes, with positive showings expected to bolster the positive outlook of the ‘Greenback’.

Current Interbank Exchange Rates

At the time of writing, the Pound to Euro (GBP EUR) exchange rate was on a downtrend at 1.10, while the Pound to US Dollar (GBP USD) pairing was slumped in the region of 1.22.