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Dovish BoE Commentary Saw Pound Euro Extend Slump

January 5, 2017 - Written by Tim Boyer

The Pound to Euro exchange rate extended its weekly lows on Friday morning as markets maintained a bearish view on the British currency amid dire UK forecasts and Brexit jitters.

Demand for the Euro remained sturdy even after the US Dollar began to strengthen on Friday afternoon, as the week’s Eurozone data had left investors more optimistic on the Eurozone economy.

(Previously updated 05/01/2017)

The rapid appointment of a new EU ambassador did little to limit the losses of Pound Sterling (GBP) on Thursday morning, with Brexit-based uncertainty weighing on the Pound Euro (GBP EUR) exchange rate once again.

Dovish BoE Comments Weighed on Pound Sterling Outlook

December’s UK Services PMI bettered expectations to strengthen from 55.2 to 56.2, indicating that the sector ended the fourth quarter in a solid state of growth.

This suggested that the negative impact of the Brexit vote has continued to fade, although the survey did point towards an increasing level of inflationary pressure within the domestic economy.

While this stronger showing offered some encouragement to the GBP EUR exchange rate investors were not keen to pile back into the Pound at this juncture.

The bearish Sterling outlook was reinforced by commentary from the Bank of England’s (BoE) chief economist Andy Haldane, who indicated that consumers could face a harder time in 2017 as higher inflation is likely to bite.

Euro Shored up by Encouraging Eurozone Data

Confidence in the Euro (EUR), meanwhile, was boosted by a better-than-expected raft of Eurozone PMIs, which showed that the domestic retail sector had rebounded solidly in December.

An uptick in the Eurozone Producer Price Index also boosted demand for the single currency, fuelling speculation that rising inflation could prompt the European Central Bank (ECB) to take a more hawkish view on monetary policy.

Even though the Federal Reserve meeting minutes for December added further support to expectations of multiple interest rate hikes in 2017 this was not enough to shore up the GBP EUR exchange rate.

However, with concerns still circling that Italy could see early elections and markets jittery over the possible outcome of the upcoming German and French elections the overall appeal of the Euro was still limited.

Falling German Factory Orders Forecast to Boost GBP EUR Exchange Rate

Market sentiment is likely to keep the Pound on a weaker footing going into the weekend, with little in the way of fresh data to distract from the uncertainty of the government’s plan for Brexit.

Demand for the Euro could weaken, meanwhile, if the latest German factory orders figures prove discouraging, with forecasts pointing towards a -2.5% contraction on the month.

Signs of weakness within the Eurozone’s powerhouse economy may put an end to the suggestion that the ECB will begin to taper its quantitative easing program sooner rather than later, giving the GBP EUR exchange rate an opportunity to rally.

Volatility for the single currency is also expected with the release of the US Non-Farm Payrolls report, which may boost the Euro if the unemployment rate is found to have risen in December.

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