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GBP EUR Exchange Rate Slumps Sharply on Brexit ‘Deadlock’

October 12, 2017 - Written by Ben Hughes

As the latest round of Brexit talks ended with rather pessimistic tone from officials the Pound Euro exchange rate slumped sharply.

Although earlier signs had pointed towards a lack of any tangible progress at this juncture investors were still disappointed by the downbeat tone of the press conference.

With Theresa May still adopting a harder line of rhetoric with regards to Brexit, and the Conservative government lacking any coherent approach to the matter, the appeal of the Pound remains limited.

As it now looks unlikely that the second phase of negotiations will commence on schedule the threat of a disruptive exit from the EU appears to be increasing once again.

On the other hand, the mood towards the Euro improved in response to better-than-expected Eurozone industrial production figures.

With the domestic economy still demonstrating signs of robust growth, in spite of an increased sense of political uncertainty, investors were encouraged to pile back into the single currency on Thursday.

BoE Report Points Towards Rising Financial Pressure on UK Households

Markets were dismayed as chief EU negotiator Michel Barnier noted that discussions over the proposed divorce bill have reached a deadlock, affirming fears that progress towards an agreement is still lacking.

Although there were some noises over the prospect of some ‘decisive progress’ before Christmas this did not convince investors, or limit the softening of the Pound.

Confidence in Sterling was also somewhat shaken by the third quarter Bank of England (BoE) credit conditions survey.

While the report showed that lenders have begun to rein in their lending, in line with the BoE’s earlier warning, the news that defaults are on the rise was less-than-positive.

With consumers already struggling thanks to the ongoing wage squeeze there are concerns that economic growth could come under increased pressure in the coming months as credit availability diminishes.

This could represent a significant downside risk to the third and fourth quarter gross domestic product data, boding ill for the outlook of the wider economy.

Even so, with momentum behind a potential leadership challenge to Theresa May appearing to have diminished the sense of political risk for GBP exchange rates has eased.

However, even if the minority Conservative government shows greater signs of stability this is unlikely to particularly ease market concerns over the prospect of a hard Brexit, which could see the UK fall back on WTO rules when it exits the EU in 2019.

Positive Eurozone Growth Outlook Supports Euro

Following the recent raft of positive Eurozone data demand the Euro has remained on a generally bullish footing against its rivals as the economic outlook continued to improve.

As Peter Vanden Houte, Chief Eurozone Economist at ING, noted:

‘Pundits have been revising upwards their growth prospects for the Eurozone economy throughout the year, as economic indicators have continued to surprise to the upside. Indeed, where at the beginning of the year a 2% growth rate looked out of reach, we will now likely be above that level. Countries that experienced a deep real estate slump during the great recession like the Netherlands, Spain and Ireland, are likely to even print growth figures above 3.0%. But the good news is that some of the member states that have been lagging, like Italy, are now also seeing signs of a more robust pick-up. At the same time a more reform oriented government in France seems to result in structural reforms that might lift the growth potential of the French economy. The German juggernaut still doesn’t show much signs of slowing after seven years of expansion.’

Even so, the ongoing Catalan crisis remains a significant headwind to EUR exchange rates after the Spanish government made a veiled threat to invoke article 155 of the constitution.

If Madrid moves to suspend regional autonomy in Catalonia this could inflame tensions further, casting fresh doubt over the future stability of the Eurozone at large.

Comments from European Central Bank (ECB) President Mario Draghi could also influence the Euro this afternoon, with any signs of greater hawkishness likely to encourage investors.

On the other hand, if Draghi and other ECB policymakers maintain a more cautious view on monetary policy then the GBP EUR exchange rate could find some support ahead of the weekend.
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