GBP to EUR Exchange Rate Recovers Despite Lower Pound Outlook

October 20, 2017 - Written by Ben Hughes

STORY LINK GBP to EUR Exchange Rate Recovers Despite Lower Pound Outlook

After tumbling for most of the week on Brexit concerns and pessimism about Britain’s economic outlook, the British Pound to Euro exchange rate has bounced back from its lows. Market jitters about tension between Spain and Catalonia have weakened the Euro slightly.

Despite making a decent advance last week, GBP/EUR has shed all of those gains. The pair opened on Monday at around 1.1238 and hit a low of 1.1085 on Friday morning, before adjusting and trending above the level of 1.11 again.

GBP Finds Slight Support in UK Borrowing Data

Most recent data hasn’t been strong enough to give Pound trade much support, but GBP/EUR was able to hold above the key level of 1.11 thanks partially to Friday’s UK data.

While September’s public sector net borrowing report did worsen, from £-4.14b to £-5.33b, the figure was lighter than the forecast £-5.7b. The previous figure was also revised higher from £-5.09b.

Investors were pleased that the figure revealed that this had been the smallest September borrowing deficit in a decade, since September 2007.

The UK Treasury didn’t rest on its laurels either and stated that there was still work to be done in lowering deficits further. According to a Treasury spokesperson;

‘Whilst we’ve made great progress getting the deficit down by over two thirds, government borrowing is still far too high at over £150 million a day.

We will continue to take a balanced approach that deals with our debts and allows us to invest in our public services.’

The news also indicated that UK Chancellor Philip Hammond was on track to meet his borrowing targets for the year, which was overall good news for Britain’s government.

However, Paul Hollingsworth from Capital Economics reckons the Office for Budget Responsibility (OBR) will lower its forecasts for UK economic activity, which could put strain on the UK Chancellor;

‘Moreover, it looks set to revise down its assumptions about productivity and the economy’s potential to grow in its November forecasts, which is likely to significantly reduce the room the chancellor left himself against his fiscal targets. As a result, this is likely to constrain the chancellor’s ability to provide big giveaways in the very near term.’

Fresh hopes that progress can be made in Brexit negotiations and trade-talks between the UK and EU can begin within the foreseeable future have also helped the Pound to rebound from its lows on Friday.

Euro (EUR) Mixed on Spanish Political Uncertainties

News that Spain had lowered its 2018 growth forecasts due to the political uncertainties surrounding Catalonia weighed slightly on the Euro on Friday.

Spain had previously forecast that its economy would grow at around 2.6% in 2018, but now only expects 2.3% growth.

This could be indicative that the Spanish government doesn’t expect things in the Catalonian region to be entirely smooth sailing in the foreseeable future.

It’s now expected that Spain’s government will meet on Saturday to trigger ‘Article 155’ of the constitution, which would allow it to take legal control over the Catalonian region.

The option of direct rule will unsurprisingly be an unpopular one with Catalonian separatists, so it is speculated that tensions could worsen for a time.

Markets are still generally optimistic about the Euro though. The European Central Bank (ECB) is expected to announce its plans to unwind quantitative easing (QE) next week.

GBP/EUR Forecast: European Central Bank (ECB) Meeting in Focus

Unless there are some big political surprises over the weekend, analysts reckon that market concerns about Catalonia are now largely priced into the Euro already.

This means that in the coming sessions, Euro traders will be focusing on next Thursday’s highly anticipated European Central Bank (ECB) policy decision.

For months markets have been speculating that the European Central Bank (ECB) will take a gradually more hawkish tone on monetary policy and begin to withdraw its aggressive quantitative easing (QE) program, hinting that the Eurozone’s economic recovery is progressing.

Reports suggest that the ECB plans to pull back most of its QE scheme, but leave some remaining for an extended period of time due to the recent strength of the Euro.

Depending on the ECB’s tone next week, the Euro could see a notable shift in movement.

If the ECB is more dovish than hoped, GBP/EUR is likely to surge.

The Pound could also be influenced by Britain’s Q3 growth projections, which are due to come in on Wednesday. Markit’s PMI projections for the Eurozone could influence the Pound to Euro exchange rate in the coming week too.

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TAGS: Pound Euro Forecasts