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EUR GBP Exchange Rate Soars Higher as Pressure Mounts on Theresa May

November 13, 2017 - Written by Frank Davies

Although October’s German wholesale price index data pointed towards an easing in price pressures this failed to keep the Euro Pound exchange rate on a weaker footing.

Markets were rather more concerned by the latest developments surrounding Brexit, with the investors increasingly worried by the prospect of the UK government not achieving a transitional deal.

With another round of Brexit talks having concluded with minimal signs of progress there is frustration over the persistent lack of clarity on the UK outlook, something which is already showing signs of damaging domestic growth.

The selling of the Pound also intensified in response to news that 40 Conservative MPs have now agreed to sign a letter of no confidence in Theresa May.

All in all, the minority government looks to be in a rather fragile position as Parliament prepares to begin debating the EU withdrawal bill once again.

Brexit Concerns Limit Pound Sterling Potential

The Pound thus looks set to remain biased to the downside over the coming days, with political concerns still dominating sentiment towards the currency.

Even though some degree of domestic risk is already priced into GBP exchange rates this has failed to limit Sterling’s softness at this juncture.

As Lutz Karpowitz, analyst at Commerzbank, commented:

‘So what is happening with the Brits? Is London really living in a dream world? An explanation of that nature is a little too limited. Instead one should see the British position as a strategy. At the core of the strategy rests the assumption that in the end Brussels will cave in. First of all because one country on its own can remain firm much more easily than a whole group of countries; secondly as the economic difficulties will affect the Europeans as well as the UK.

‘In view of this strategy none of the threats from Brussels have an effect and as a result nothing is happening. London expects Brussels to compromise at the last minute rather than to capitulate right away. If the UK pursues this strategy in a consistent manner a further escalation is likely. The latter is virtually part of the British plan. The major disadvantage of such a strategy is that it is inflexible. It makes it impossible to react to signals sent out by the opposing party. In poker one would call that “all in”. But what if the Europeans ask the Brits to show their cards? Let us not think of the worst case scenario quite yet, but nonetheless one should consider carefully before entering GBP longs and wonder whether the situation is not getting a little hot as the summit in December approaches.’

However, the EUR GBP exchange rate could be prompted to trend lower if the UK consumer price index proves encouraging on Tuesday.

If inflation continues to accelerate this could give the Bank of England (BoE) incentive to consider further monetary tightening, a prospect which would be supportive for the Pound.

On the other hand, any dip in price pressures may give investors further reason to pile out of Sterling.

Euro Exchange Rates to Remain Buoyant on Solid German Growth

Confidence in the Eurozone economic outlook remains generally heightened in the wake of the European Commission’s upwardly revised forecasts.

Even so, the International Monetary Fund (IMF) warned on Monday that Europe’s economies could also suffer a slowdown in the event of a hard Brexit.

This somewhat limited the appeal of the Euro, although the EUR GBP exchange rate continued to make solid gains nevertheless.

Greater support could be in store for the single currency, though, with the release of the third quarter German gross domestic product data.

Another solid showing from the Eurozone’s powerhouse economy would undoubtedly add to the odds of the currency union outpacing the US in growth for a second year running.

As the European Central Bank (ECB) looks set to maintain a relatively dovish outlook on monetary policy in the coming months, however, the upside potential of EUR exchange rates is likely to remain somewhat limited.
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