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GBP EUR Exchange Rate Remains Biased to Downside over Hard Brexit Worries

October 28, 2016 - Written by James Fuller

Uneven Nature of UK Growth Sees Pound Sterling Return to Weaker Footing



Despite Thursday’s stronger-than-expected UK GDP report the Pound (GBP) soon returned to a downtrend against rivals, with investors concerned by the fact that growth remained entirely driven by the service sector.

Support for Sterling was also limited by a fresh dip in the GfK Consumer Confidence Index, which weakened from -1 to -3 in October.

Altogether this did not paint the most encouraging picture of the UK economy, despite markets remaining confident that the Bank of England (BoE) will not opt to loosen monetary policy at its November meeting.

As a result, with the general mood remaining bearish, the Pound Euro (GBP/EUR) exchange rate trended lower ahead of the weekend.

Euro (EUR) Trended Higher Despite Weaker-than-Expected French GDP



Confidence in the Euro (EUR) was somewhat diminished, meanwhile, by disappointing French GDP results.

While growth improved from -0.1% to 0.2% on the quarter this was still weaker than forecast, limiting any positive impact from the data.

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Even so, an unexpected jump in Eurozone economic confidence, from 104.9 to 106.3, encouraged investors to favour the single currency and pushed the GBP/EUR exchange rate further into a slump.

This stronger showing helped to boost the Euro ahead of the afternoon’s German Consumer Price Index, which is forecast to show another uptick in inflationary pressure and could reduce the impetus for the European Central Bank (ECB) to engage in further easing measures.

Hardening Brexit Rhetoric Forecast to Weigh on GBP/EUR Exchange Rate



Additional volatility is likely for the GBP/EUR exchange rate in response to the latest US data, which could see the odds of a December rate hike from the Federal Reserve increased.

A US Dollar (USD) rally could limit the strength of the Euro going into the weekend, although the Pound could also be weighed down by the likelihood of increased central bank policy divergence.

Regardless, the GBP/EUR exchange rate is expected to remain biased to the downside over coming days due to the persistence of Brexit-based anxiety.

The prospect of a severe divorce from the EU continues to seem the likely outcome of the referendum, as analysts at Nomura noted:

‘While momentum is headed for a Hard Brexit, if support for a Soft Brexit increased within non-core members, the hard-line rhetoric could weaken. However, there are a number of caveats to these arguments. Core EU countries could likely find ways of incentivising peripheral countries to endorse a “Hard Brexit”. The rise of Euroscepticism also provides incentives for the establishment to make an example out of the UK’s exit.’

Even positive UK data seems unlikely to divorce the Pound from political developments, leaving the GBP/EUR exchange rate vulnerable to further decline over coming weeks.
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