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GBP EUR Exchange Rate Trends Narrowly Ahead of ECB and BoE Comments

June 26, 2017 - Written by Frank Davies

As the Conservatives and the Democratic Unionist Party (DUP) finally agreed a confidence and supply arrangement the Pound Euro exchange rate was encouraged to trend higher.

However, this sense of optimism proved remarkably short-lived as the future of the minority Conservative government is still far from guaranteed at this juncture.

While Brexit negotiations appear to have gotten off to a solid enough start a sense of uncertainty is likely to hang over the appeal of the Pound for some time to come.

If Theresa May continues to pursue a hard-line of rhetoric on the matter of Brexit, in spite of a recent concession on the status of EU citizens, this could limit the upside potential of Sterling.

As Sylwia Hubar, analyst at Natixis, noted:

‘The exit bill and its calculation are expected to be a source of disagreement. The EU has not released a detailed bill yet, but the figure of EU 60 billion has been mentioned in a study conducted by the Centre of European Reform (February 2017). If this is the case, the financial settlement represents only 2.5% of UK’s 2016 GDP and although reassuring should be taken with caution. The adverse impact of Brexit on the economy is likely to become more apparent throughout the negotiation period, curbing the UK’s flexibility.’


With many issues likely to raise tensions at the negotiating table the GBP EUR exchange rate may struggle to gain sustained traction in the coming months, as the threat of an exit via the cliff edge persists.

Euro Muted Ahead of ECB Comments



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Demand for the Euro, meanwhile, was muted as the Italian banking sector returned to the spotlight once again.

While the Italian government stepped in to wind down two failing regional banks this failed to encourage particular investor confidence, with the move seeming to undermine confidence in the principles of the banking union.

As tensions have also been mounting in Greece thanks to a dispute over the expiration of short-term contracts for municipal workers the single currency came under fresh pressure at the start of the week.

Although the latest German Ifo business confidence surveys pointed towards a continued uptick in domestic sentiment the Euro was unable to make any particular gains against the Pound.

Markets have continued to speculate over the policy outlook of the European Central Bank (ECB), with policymakers expected to maintain a neutral to dovish bias in spite of this positive domestic data.

Further volatility is likely in store for the EUR GBP exchange rate as a result of fresh policymaker commentary, as analysts at TDS noted:

‘The ECB’s Sintra conference kicks off this evening, with opening remarks from President Draghi at 6:30pm BST, and a speech from former Fed Governor Bernanke. The conference runs through Wednesday, and we’ll be keeping an eye out for any chatter on the side-lines as well, especially with regard to the ECB’s eventual tapering strategy.’


If Draghi is seen to take a less cautious view on the policy outlook this could encourage the GBP EUR exchange rate to slump, boosting bets that the quantitative easing program could see some tapering before the end of the year.

On the other hand, any reiteration of his neutral view on interest rates and quantitative easing may leave the Euro on a weaker footing against its rivals.

Dovish Carney Could Limit Pound Upside



Confidence in the Pound could weaken, meanwhile, in response to the latest comments from Bank of England (BoE) Governor Mark Carney.

Speaking at the publication of the quarterly Financial Stability Report, Carney is likely to talk down the prospect of an imminent interest rate hike.

However, given the signs of an increasing split within the Monetary Policy Committee (MPC) even dovish words may struggle to keep the Pound on a downtrend for long.

A stronger showing from May’s consumer credit and mortgage approvals data could offer the GBP EUR exchange rate a rallying point.

If consumers continue to demonstrate stronger confidence in spite of ongoing Brexit concerns policymakers could be encouraged to take a more optimistic view of the domestic economy.
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