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Pound Euro Rate Remains Under Pressure as Odds of Hard Brexit Rise

January 10, 2017 - Written by John Cameron

The Pound to Euro exchange rate continued to trend relatively tightly on Wednesday afternoon, but was largely unable to hold its best daily levels.

Markets turned their attention to a press conference held by US President-elect Donald Trump, leaving the Pound and Euro even limper. The pair could fall again in the coming days if investors begin to increase their bets against the Pound again.

[Previously updated 10/01/2017]

Stronger-than-expected German trade data helped to push the Pound Euro (GBP EUR) exchange rate lower at the start of the week, particularly as investors’ Brexit-based anxiety flared back up.

Concerns over Single Market Access Weighed on Pound Sterling

Speculation that the UK could lose its current privileged level of access to the single market has weighed heavily on the Pound since the start of the week, following comments from Prime Minister Theresa May.

Although May has since stressed that nothing is yet set the view of Sterling remained bearish on Tuesday, with markets still frustrated by the lack of clarity regarding the government’s plan for Brexit and its aims for negotiations.

In the absence of any major UK data this left the GBP EUR exchange rate on a weaker footing, particularly as a decrease in risk appetite boosted the single currency further.

Brexit Risk Forecast to Keep GBP EUR Exchange Rate Biased to Downside

Confidence in the Pound may struggle to recover on Wednesday, given that forecasts point towards a widening of the UK trade deficit in November.

As Sterling has weakened substantially since the Brexit vote any widening of the deficit is likely to be seen as a cause for concern, undermining confidence in the outlook of the economy and its ability to weather further Pound volatility.

However, a rallying point could come on the back of the latest raft of industrial and manufacturing production figures, which are expected to have rebounded modestly after October’s sharp contractions.

Fresh signs of strength within the UK economy could encourage greater demand for the Pound, even though fears of a hard Brexit are likely to maintain downside pressure on the GBP EUR exchange rate for some time to come.

As researchers at ING noted:

‘While the Brexit risk premium has started being priced back into GBP, it is nowhere near October levels (10% in the time based on our short term fair value model vs 1-2% currently). The rather contained Brexit risk premium at this point and the bumpy road ahead in terms of the negotiations about the terms of Brexit suggest more downside to GBP.’

Dovish ECB Minutes Likely to Limit Euro Strength

Volatility could be in store for the Euro ahead of the European Central Bank’s (ECB) December meeting minutes, on the other hand.

Although investors have been hoping to see increased signs of hawkishness from policymakers it seems unlikely that the minutes will suggest that any imminent tapering of the ECB’s quantitative easing program is likely.

Any particularly dovish sentiment within the minutes could prompt the single currency to weaken against its rivals, with markets unlikely to greet any indication that the central bank is maintaining a more cautious view on monetary policy.

However, if the ECB is seen to be moving away from its easing bias then the GBP EUR exchange rate may fall towards fresh lows.

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