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Surprise UK Industrial Output Contraction Weighs on Pound Euro Exchange Rate

December 7, 2016 - Written by Toni Johnson

Disappointing UK Production Data Softened Pound Sterling Exchange Rates



Investors were disappointed when October’s UK industrial and manufacturing figures fell significantly short of forecast, showing an unexpected contraction across the board.

This naturally undermined confidence in Pound Sterling (GBP), indicating that the UK economy is still under pressure despite stronger PMI figures.

The mood towards the Pound was also dampened by news that the Office for National Statistics had revised its pre-referendum trade deficit figures, revealing that the widening seen since the vote has been more pronounced that initially thought.

With Brexit-based jitters persisting this saw the Pound Euro (GBP EUR) exchange rate slump sharply on Wednesday morning.

Euro Boosted by Hopes of Italian Banking Sector Rescue Plan



Confidence in the Euro (EUR) recovered on Wednesday morning in response to reports that Italy could be seeking aid from the European Stability Mechanism (ESM) in order to recapitalise its banks.

With investors increasingly hopeful that Monte dei Paschi will not be allowed to crumble, despite its fund raising efforts thrown into doubt as a result of Prime Minister Matteo Renzi’s resignation, the single market has found fresh support.
However, both the Italian Treasury and ESM have since denied that there has been any request for funds, prompting the Euro to shed some of its earlier gains.
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Disappointment also stemmed from Germany’s latest industrial production figures, which fell short of forecast in October to offer a fresh sign of vulnerability within the Eurozone’s powerhouse economy.

Dovish European Central Bank Commentary Expected to Boost GBP EUR Exchange Rate



Although the ongoing proceedings in the Supreme Court hearing on the government’s Article 50 appeal could provoke further volatility for the GBP EUR exchange rate greater focus will be on the European Central Bank (ECB) policy meeting.
Expectations are for policymakers to announce an extension of the quantitative easing program, which could see the appeal of the Euro sour further.

As Derek Halpenny, European Head of GMR at MUFG, noted:

‘ Even though the cyclical picture for the euro-zone economy looks to be improving, more serious problems related to the cohesion of the single market could be brewing. Given the escalated political uncertainty, now doesn’t appear to be the time to signal an end of ECB support that is clearly helping to stabilise financial markets in the euro-zone. We do not expect the resilience of the euro to persist whatever the outcome of the ECB meeting tomorrow.’

Nevertheless, if the ECB signals that it is willing to take greater action to support the Italian banking sector then the GBP EUR exchange rate may still struggle to return to a stronger footing.
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