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Weak German Production Leaves Euro Pound Exchange Rate on Narrow Downtrend

While UK data has proven largely disappointing in recent days the Euro Pound exchange rate has nevertheless come under pressure.

An unexpectedly sharp contraction in German industrial production on the month saw demand for the single currency slump on Tuesday morning, undermining confidence in the Eurozone’s powerhouse economy.

The latest commentary from European Central Bank (ECB) President Mario Draghi added to the bearish mood of the Euro, with the policymaker reiterating his commitment to relatively loose monetary policy.

This all limited the positive impact of a better-than-expected uptick in September’s Eurozone retail sales, especially as consumer confidence has shown some signs of weakening in the meantime.

Even so, the Euro could find a rallying point on Thursday if the latest raft of German trade data paints a more positive picture.

If the trade surplus widens once again on the month this may improve confidence in the outlook of the German economy, highlighting its continued resilience.

However, as forecasts point towards a sharp contraction of -1.3% in export volumes on the month this could give markets fresh cause for concern and policymakers further incentive to leave monetary policy on hold.

Pound Rally Forecast on Brexit Negotiation Progress

Even though the British Retail Consortium (BRC) like-for-like retail sales data showed an unexpected contraction on the month this failed to particularly weigh on the Pound.

Better-than-expected housing price figures helped to limit the downside bias of Sterling at this juncture, with investors still reversing the sharp losses seen in the wake of the Bank of England’s (BoE) relatively dovish meeting minutes.

Increased volatility is likely for the EUR GBP exchange rate in the coming days, though, as markets prepare for the outcome of the latest round of Brexit talks.

As analysts at ANZ noted:

‘What is needed to progress to Phase 2 negotiations, however, is agreement on the methodology for calculating the UK’s liability, not actually a number. That would represent “significant progress”, whilst it is also strongly rumoured that PM May is willing to offer considerably more than EUR20bn.

‘For the time being, the market may favour pushing the downside for the Pound. That, nevertheless, should come with a large caveat: an improvement in the climate surrounding Brexit negotiations will expose a material flaw in the underlying assumptions under which GBP is being sold.’

If there are any signs of progress this should see the Pound making solid gains across the board, even though the final deal remains a distant prospect at this stage.

Current EUR GBP Interbank Exchange Rates

At the time of writing, the Euro Pound exchange rate was trending narrowly at 0.8814. Meanwhile, the Pound Euro exchange rate was making minor gains at 1.1344.