?Brexit? Sentiment Rules Supreme, GBP EUR Exchange Rate Largely Ignores GDP Rise

October 27, 2016 - Written by John Cameron

STORY LINK ?Brexit? Sentiment Rules Supreme, GBP EUR Exchange Rate Largely Ignores GDP Rise

The GBP EUR exchange rate spiked briefly this morning, reaching a new high for the week as the UK’s GDP figures printed better than expected, but it quickly fell again as the uncertainty of ‘Brexit’ continued to pressure the Pound (GBP).

Positive GDP Data Unable to Improve Pound (GBP) Euro (EUR) Exchange Rate

As Thursday's European session progressed the Pound was trading higher against the Euro (EUR) than immediately before the GDP report, but the currency pair still remains down from the week's highs.

The Pound has become an increasingly politicised currency since Britain’s vote to leave the EU as it begins to largely ignore domestic data. Investor movements have been predominantly driven by market sentiment towards ‘Brexit’, which remains negative as fears mount that the UK will lose access to the single market in a ‘hard Brexit’.

However Sterling may be bolstered by speculation that the strong GDP figures will prevent the Bank of England from making an additional rate cut this year. According to Andrzej Szczepaniak of Barclays says;

‘With headline GDP growth at 0.4pp above the BoE forecast as at the August 2016 Inflation Report, the Committee will now likely deviate from its pre-commitment of another cut this year and instead keep the powder dry for next year given we expect growth to slow further.’

Euro (EUR) Sentiment May Drop as QE Speculation Rises

The Euro may soon find itself under pressure as there is increasing speculation that the European Central Bank (ECB) will seek an extension to its current quantitative easing programme which was expected to come to an end in March 2017.

Central bank sources have apparently said that the ECB will look to extend its bond-buying later into 2017 to help support the recent uptick in the European economy.

This is supported by ECB President Mario Draghi's speech last week following the bank's latest policy meeting in which he wished to remain flexible to ensure that current growth in the Eurozone continues.

This is likely to drag on the Euro as monetary easing has been increasingly blamed for the low profitability of European banks and for helping attribute to the Deutsche Bank crisis in September.

GBP EUR Exchange Rate Forecast: German CPI Likely to Pressure Sterling

The Pound may struggle to hold its ground against the Euro on Friday with the release of the latest German consumer price index which is expected to rise from 0.7% to 0.8% in October.

Sterling is also likely to tumble tomorrow as Nationwide releases its UK house price data for October, which is forecast to drop to 4.9% down from 5.3% the month before, although an unexpected rise could earn the Pound some respite against falling market sentiment.

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