As the UK gross domestic product unexpectedly picked up in the third quarter, from 0.3% to 0.4%, the Pound rallied sharply against its rivals.
This suggests that the UK economy has continued to largely shrug off the negative impact of lingering Brexit-based uncertainty, even though growth is still some way below its long-term average.
Markets see this stronger showing as further encouragement for the Bank of England (BoE) to go ahead with a November interest rate hike, in spite of recent signs of policymaker dovishness.
As Jane Foley, Senior FX Strategist at Rabobank, noted:
‘The implication is that for many forecasters, the expectations of a rate rise on November 2 is not necessarily consistent with what they think the Bank should do, but rather what the MPC now looks likely to do. To protect its credibility, we do now expect that the Bank will hike rates in November. However, due to weakness in recent economic data, we anticipate that the Bank will not be able to follow on with another move for some time. The dovish hike scenario suggests that upside potential for the Pound on a policy move in November is likely to be limited.’
Even so, the Pound Euro exchange rate may struggle to hold onto its latest gains for long, with the economy still showing underlying signs of weakness.
Any softness in Thursday’s CBI reported retail sales data could prompt Sterling to return to a downtrend, especially if confidence in the prospect of any imminent Brexit progress starts to fade.
Euro Muted as Markets Brace for Dovish ECB Taper
October’s German IFO business sentiment surveys bettered expectations, demonstrating a strong surprise uptick in domestic optimism.
This encouraged investors to pile back into the single currency, even though it was not enough to reverse the GBP EUR exchange rate uptrend.
Confidence in the Euro may deteriorate in anticipation of tomorrow’s European Central Bank (ECB) policy decision, even though policymakers are likely to announce tapering of the quantitative easing program.
Even so, ECB President Mario Draghi may well maintain a relatively dovish tone on monetary policy, which could limit the appeal of the single currency at this juncture.
A more optimistic message from policymakers, on the other hand, would give EUR exchange rates a strong boost on hopes of a less cautious approach towards policy normalisation in the coming months.
Focus will also turn back towards Catalonia, where the regional parliament is due to meet in order to respond to the Spanish government’s imposition of direct rule.
If the region opts to make a unilateral declaration of independence this could weigh heavily on the Euro, offering the GBP EUR exchange rate some support.
However, if the Catalan crisis shows some signs of de-escalation then the mood towards the single currency could improve once again.
Current GBP EUR Interbank Exchange Rates
At the time of writing, the Pound Euro exchange rate was making solid gains in the region of 1.1202. Meanwhile, the Euro Pound exchange rate was slumped around 0.8928.