GBP EUR Exchange Rate Under Pressure as Eurozone Continues to Power Ahead

November 24, 2017 - Written by Frank Davies

STORY LINK GBP EUR Exchange Rate Under Pressure as Eurozone Continues to Power Ahead

Demand for the Pound faltered on Friday morning as the latest YouGov survey found that UK consumer confidence had fallen to a post-Brexit low.

At 106.6 the measure equalled the reading seen in the immediate aftermath of the Brexit vote, suggesting that consumers are taking a much more gloomy view this month.

Some of this was attributed to the Bank of England’s (BoE) decision to raise interest rates to 0.5%, marking the first rate hike in a decade.

Following on the heels of the mixed reaction to the 2017 Budget this left the Pound Euro exchange rate to trend lower, undermining the appeal of Sterling.

Bullish German Business Confidence Boosts Euro

Signs from the Eurozone economy, meanwhile, continued to paint a much more positive picture for investors.

German business confidence surged higher, as the IFO business climate index jumped to 117.5 and the expectations measure climbed from 109.1 to 111.0.

This suggests that sentiment within the Eurozone’s powerhouse economy is holding up, even under the shadow of political uncertainty that has stemmed from the collapse of coalition talks.

In the wake of November’s stronger-than-expected French and German PMIs this helped to extend the Euro’s bullish run, bolstering optimism in the outlook of the currency union.

However, the political situation in Germany could still weigh on the Euro in the weeks to come, as analysts at ANZ noted:

‘The failure of the coalition talks in Germany holds few implications for the short term growth outlook. But no clear leadership in Europe’s largest economy means progress towards deeper European integration will be delayed and some aspects could be derailed.

‘Progress in implementing structural reforms may also be curtailed by the fracturing political backdrop. That is bad news for medium to longer term growth prospects and would imply that interest rates could stay lower for longer.

‘The political climate also provides an exogenous headwind for the euro and a counterweight to the positive influence that strengthening domestic demand has on the single currency.’

If the odds of fresh German elections mount further the mood towards the Euro is likely to deteriorate, to the benefit of the GBP EUR exchange rate.

Even so, the downside potential of the single currency looks set to remain limited in the near term if Eurozone data continues to perform well.

With the currency union on track to outpace the US economy for the second year in a row investors are unlikely to significantly alter their view of EUR exchange rates.

GBP EUR Vulnerable to Volatility on Brexit Developments

Demand for the Pound could recover somewhat if there are fresh signs of progress in Brexit negotiations, though.

With Theresa May apparently authorised to increase the offer to pay the UK’s divorce bill there are hopes that talks could have a shot of progressing to their second phase before the end of the year.

Any indications that the EU is willing to allow discussion of a future trade deal to begin this could offer Sterling a boost against its rivals.

Even so, confidence in the domestic outlook is likely to remain rather limited thanks to the Office for Budget Responsibility’s (OBR) downgraded economic forecasts.

Tim Riddell, research analyst at Westpac, commented:

‘However, further growth downgrades highlight the vulnerabilities of the economy as Brexit realities begin to bite. May and Hammond may have secured their positions for the time being, but the need to break the deadlock of Brexit negotiations by the current 4th Dec apparent deadline, with decidedly limited financial flexibility, means that politics could again unsettle or even unseat May, her Cabinet and GBP.

‘Lower growth reflects poor productivity. Both Brexit and constrained consumers are unlikely to provide any real lift post the budget and so any relief gains in GBP should prove to be limited.

‘Any stumble in Brexit negotiations might reinstate downside pressures on GBP.’

With fresh domestic data relatively thin on the ground in the coming week this should leave the GBP EUR exchange rate vulnerable to the downside.

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Euro Forecasts