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Pound Exchange Rates Weaken vs Euro, US Dollar as Brexit Fears Harden

Confidence in Pound exchange rates has been thin in the wake of comments from Foreign Minister Boris Johnson that suggested that exit proceedings from the EU could start in early 2017.

  • BBA mortgage approvals fell 20% in August – Questionable health of UK housing market dented Pound demand further
  • Surprisingly strong IFO Business Sentiment Survey boosted Euro – Eurozone’s powerhouse economy showed greater signs of recovery
  • Presidential election worries weighed on US Dollar – Markets unsettled as gap between candidates narrowed
  • Brexit-based uncertainty forecast to maintain downside pressure on GBP exchange rates – Investor confidence expected to remain muted

Signs of optimism within the German economy helped to overshadow worries surrounding the future of Deutsche Bank, meanwhile, and prompted the GBP EUR exchange rate to trend lower.

Pound (GBP) Remained Soft on Mounting Brexit Concerns and Mortgage Decline

Brexit worries have continued to weigh heavily on the Pound (GBP) at the start of the week, with mounting concern amongst investors that leading politicians are taking a harder line on the issue. The mood towards Sterling was also soured by the news that August’s BBA Loans for House Purchase report was weaker than forecast, with mortgage approvals dipping 20% on the month. This suggested that confidence within the UK housing market was not as robust as previously thought, exacerbating worries over the outlook of the domestic economy.

Confidence in the Pound is unlikely to substantially recover in the absence of additional UK data, with investors left to dwell on the uncertainty that shrouds the country’s future outside the EU. Even so, Thursday’s net consumer credit figure could offer GBP exchange rates a rallying point, providing that the measure prints positively. Higher levels of consumer credit would suggest greater optimism amongst lenders and consumers alike, something which could ease the anxiety dragging on Sterling. However, if the data disappoints then the Pound is likely to continue trending in the region of its recent multi-week lows.

GBP EUR Exchange Rate Slumped Following Bullish German Sentiment Survey

Demand for the Euro (EUR) was boosted by September’s IFO Business Sentiment Survey, which showed a strong surge in confidence within the German economy. The survey smashed forecasts to strengthen from 106.2 to 109.5, demonstrating an improvement in both the current assessment and the business expectations measures. While this bullish result runs somewhat counter to other recent German data, the single currency was nevertheless buoyed higher by this fresh sign of robustness within the Eurozone’s powerhouse economy. However, as Carsten Brzeski, Chief Economist at ING, notes:

‘One year ahead of the important national elections, the German economy has entered a risky stage. The economy’s virtuous circle is running on its last leg and is in fact artificially extended by the ECB’s ultra-loose monetary policy and the refugee-related increase in government spending.’

Following this strong showing hopes are likely to be higher for October’s GfK Consumer Confidence Survey, which is forecast to hold steady at 10.2. Should consumer sentiment show a similar uptick to the latest business confidence measure then the Pound to Euro (GBP EUR) exchange rate is expected to remain weak. Fresh commentary from members of the European Central Bank (ECB) could offer further support to the single currency, providing that policymakers do not adopt a particularly dovish tone.

Election Worries Weighed on US Dollar (USD) Despite Safe-Haven Demand

Although markets turned increasingly jittery ahead of the first US presidential debate this did not particularly benefit the US Dollar (USD). The appeal of the ‘Greenback’ has been hampered by worries over the outcome of the election, with the gap between the candidates appearing to have narrowed over the last week. With confidence in the strength of the world’s largest economy already muted and the odds of an imminent Federal Reserve rate hike limited the ‘Greenback’ has struggled, allowing the Pound to US Dollar (GBP USD) exchange rate to narrow its losses somewhat.

Regardless of the outcome of the debate, the US Dollar is likely to remain volatile ahead of the September Consumer Confidence Index. Investors are expecting the index to weaken from 101.1 to 98.8, a result which would not inspire particular confidence in the robustness of the US economy. An upside surprise could shore up the ‘Greenback’, even if this softer economic measure would be unlikely to shift the outlook of the Fed.

Current GBP, EUR, USD Exchange Rates

At the time of writing, the Pound to Euro (GBP EUR) exchange rate was slumped around 1.1504, while the Pound to US Dollar (GBP USD) pairing was trending narrowly in the region of 1.2950.