Homepage » Brexit » Pound Recovery Runs out of Steam, EUR GBP Exchange Rate Rises

Pound Recovery Runs out of Steam, EUR GBP Exchange Rate Rises

  • EUR GBP Exchange Rate Remains at 0.89 – Holds above levels of 0.88
  • European Central Bank (ECB) Official Boosts Euro – Pound holds recovery however
  • EUR Forecast: Euro to React to Catalonia Developments – Could Spanish region declare independence?
  • GBP Forecast: Is UK Leadership Stable? – Concerns remain of UK leadership challenge

Updated 12:54 BST 11/10/2017:

Amid a lack of fresh reasons to buy the Pound and a resurgent Euro, the EUR GBP exchange rate has recovered since Tuesday evening.

At the time of writing, EUR GBP trended in the region of 0.8966.

Tuesday evening saw Catalonia President Carles Puigdemont edge away from outright declaring independence for the nation, instead indicating he would rather negotiate with Spain’s government.

The news caused big relief in Eurozone markets, with investors now hoping for a diplomatic solution to tensions that would not end in Catalonia splitting off from the Eurozone’s fourth biggest economy.

This has helped the Euro to recover most of Monday’s losses against the Pound.

[Published 10:34 BST 10/10/2017]

Despite optimistic comments from European Central Bank (ECB) official Sabine Lautenschlaeger, the EUR GBP exchange rate has been pressured by Catalonia independence concerns and a recovering Pound. The pair could rise in the coming days however, if UK political jitters rise again.

EUR GBP began the week trending at 0.8978 and has slipped since Monday, briefly hitting a low of 0.8909. The pair has been able to hold above the level of 0.89 due to Euro resilience.

Euro (EUR) Supported by ECB Member’s Hawkish Comments

Ongoing political uncertainties in Spain and Germany have not been enough to make the recently strong Euro unappealing, as Tuesday saw investors once again optimistic on the Eurozone’s outlook thanks to fresh comments from a European Central Bank (ECB) official.

ECB executive board member, Sabine Lautenschlaeger, indicated that she supported calls for the bank to withdraw its asset purchasing schemes in 2018.

Her comments boosted bets that the ECB would begin to reign in its quantitative easing (QE) measures, beginning in the next few months.

However, those political uncertainties have still limited the Euro’s gains, and prevented it from recovering Monday’s losses against the Pound.

According to Stephen Innes from OANDA;

‘Her hawkish comments also appear supportive for the Euro but the political overhang has taken the air out of the Euro balloon, and this ongoing political uncertainty will most certainly cap any near-term rallies’

The Euro’s strength has been limited since last month, when Germany’s 2017 federal election ended with a smaller-than-expected win for Chancellor Angela Merkel’s CDU Party.

Political instability in Spain has caused market anxiety too. Catalonia’s government could be on the cusp of declaring independence from Spain.

Even though Spain’s Prime Minister Mariano Rajoy has stated that such a declaration would have no effect on law, Catalonia makes up around 20% of Spain’s Gross Domestic Product (GDP) so the current instability could still have a notable effect on the Eurozone economy.

Pound (GBP) Recovery Slows as UK Ecostats Come in Mixed

The Pound recovered from multi-week lows against the Euro on Monday, as investors became hopeful that UK Prime Minister Theresa May would reassert her leadership and fight off any potential challenges that would cause leadership uncertainty.

It followed a poor showing from May at the Conservative Party Conference, which prompted some critics and backbencher MPs to suggest that May wouldn’t be Prime Minister for much longer.

As political concerns cooled on Monday, the Pound recovered, but its recovery was limited by obstacles in the Brexit process as well as lasting concerns that a leadership challenge was still possible.

Sterling trade became limper on Tuesday as investors digested the week’s most notable UK ecostats, which weren’t hugely impressive overall.

Notably, Britain’s trade deficit unexpectedly widened in August, from a revised £-4.24b to £-5.63b, well below the forecast £-2.8b.

Britain’s goods deficit with the rest of the world hit a record £-14.245b due to a surge in imports of chemicals, machinery and textiles. Overall, the news continued to dampen any hopes that the Pound’s low value was helping to boost exports.

On the other hand, UK yearly industrial and manufacturing production stats were better-than-expected in August. The industrial production figure came in at 1.6% while manufacturing production jumped to 2.8%.

EUR GBP Exchange Rate Forecast: Political Developments Remain in Focus

Amid a lack of highly influential ecostats due throughout the rest of the week, EUR GBP exchange rate traders will be largely focused on any political developments or comments from central bank officials.

Catalonia’s leader, Carles Puigdemont, is expected to make a statement to Catalan Parliament over the next day, which could cause major Euro instability if he decides to declare independence.

The Euro’s losses could be limited by expectations that Catalonia will not become officially independent without an OK from Spanish law, but shared currency trade is still likely to experience volatility and uncertainty.

Over in Britain, developments from UK Prime Minister Theresa May and the Conservative Party still have the potential to cause major Pound movement. If May reshuffles her cabinet to weaken the power of ‘hard Brexit’ advocates, the Pound could surge.

Failing any political-inspired movement, the Euro could react to speeches from high ranking European Central Bank (ECB) officials towards the end of the week.

EUR GBP Interbank Rate

At the time of writing this article, the EUR GBP exchange rate trended in the region of 0.8935. The Pound to Euro exchange rate traded at around 1.1188.