GBP to EUR Exchange Rate Hits 8-Year-Low as ECB Bets Rise

August 29, 2017 - Written by Toni Johnson

STORY LINK GBP to EUR Exchange Rate Hits 8-Year-Low as ECB Bets Rise

As the third round of Brexit negotiations begin, investors continue to sell the British Pound to Euro exchange rate. Markets remain confident in the Euro outlook as the European Central Bank (ECB) has not taken a notably cautious tone recently.

GBP EUR has been steadily falling almost every week recently and last week saw it drop from 1.0944 to 1.0802. The pair dropped again on Tuesday and hit 1.0745 – its lowest level since 2009.

GBP Weak as Brexit Concerns Return to Headlines

The Pound was sold when UK markets opened on Monday, as investors reacted to news from the third round of Brexit negotiations taking place this week.

While Sterling was briefly boosted by acknowledgement from UK foreign secretary Boris Johnson that Britain had an obligation to pay a divorce bill, concerns continue to rise that negotiations are not going as smoothly as hoped.

UK Brexit secretary David Davis has kept a lid on how much he thinks Britain will need to pay for the UK-EU divorce bill and has criticised EU negotiators for their ‘inflexible’ timetable.

Meanwhile, the EU’s chief Brexit negotiator, Michel Barnier, indicated that while he welcomed the UK government’s Brexit papers, the UK’s positions on the divorce bill and separation were not clear enough. Barnier asked UK officials to ‘start negotiating seriously’.

European Commission President Jean-Claude Juncker reflected Barnier’s disappointment today, stating that none of the Brexit papers had been satisfactory.

Still, as Sterling continued to weaken from Brexit concerns, analysts think it would take a lot to push the British currency much lower. According to Viraj Patel from ING;

‘We would need to see an additional layer of bad news to fuel any further politically-induced sterling selling. This seems unlikely in the absence of a Brexit disaster situation unfolding - that is a complete breakdown in UK-EU negotiations and renewed cliff-edge risks. Political will from both sides suggests the worst-case scenario will be avoided.’

EUR Strength Firm as Investors Speculate ECB Normalising

While Brexit concerns weaken the Pound, the Euro outlook continues to improve as markets increasingly expect the European Central Bank (ECB) to take a more hawkish tone on monetary policy within the coming months.

This is despite ECB President Mario Draghi’s intentionally vague tone during the monetary policy symposium at Jackson Hole last week.

Draghi offered no new forward guidance on monetary policy or even the strength of the Euro in his speech.

As there had been rumours that Draghi would make an effort to talk down the strong Euro, markets read his silence on the shared currency as a hawkish signal, making the already strong Euro even more appealing.

According to analysts at ING Bank;

‘The focus now turns to the crucial 7 September ECB meeting: our economists note that the demand for an ECB game plan on tapering is getting stronger by the day; indeed the key arguments in favour of tapering are the successful defeat of the deflation risk, the strong economic recovery and bond scarcity. However, we note that the ECB’s preference will be for a cautious tapering, with a very gradual withdrawal of some monetary stimulus that ideally doesn’t cause any tightening of financial conditions.’

Recently Eurozone data has supported the shared currency too. Italy’s August consumer and business confidence surveys both beat expectations, as did GfK’s German consumer confidence survey for September.

GBP/EUR Forecast: German Inflation in Focus

Key German data will be published in the coming days, which could spell an end to the recent GBP/EUR downtrend if they disappoint.

Tomorrow will see the publication of Germany’s Consumer Price Index (CPI) projection for August, followed by July retail sales and August employment stats on Thursday.

Other notable Eurozone data due in the coming days includes Eurozone confidence results from August and Eurozone unemployment data from July.

With all this Eurozone data as well as ongoing European Central Bank (ECB) speculation, the Euro is likely to be the focal point of GBP/EUR trade for now.

Sterling, on the other hand, could be influenced by any developments in Brexit negotiations, as well as UK manufacturing PMI from Markit, due on Friday.

GBP/EUR recovery could be limited if Brexit negotiations show no signs of improving, or if UK ecostats fall short of expectations.

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TAGS: Pound Euro Forecasts