UK Bank Strength Not Enough to Lift GBP/EUR Exchange Rate Above Opening Levels

November 28, 2017 - Written by Toni Johnson

STORY LINK UK Bank Strength Not Enough to Lift GBP/EUR Exchange Rate Above Opening Levels

The latest Economic Outlook from the Organisation for Economic Co-operation and Development (OECD) has proven gloomy for the UK, but rosier for the Eurozone.

The GBP/EUR exchange rate is now stuck at opening levels, with the approach of German consumer confidence data preventing the Euro from capitalising on Pound Sterling weakness this morning.

UK Banks Pass Stress Tests, but GBP Weakens on Gloomy OECD Economic Outlook

All the UK’s major lenders have passed Bank of England (BoE) stress tests for the first time since 2014, according to today’s Financial Stability Review.

The stress tests involved two scenarios – an economic shock and a long-term weakness in the UK economy.

The first saw banks reviewed on their ability to withstand a global and UK economic recession that cut UK GDP by -4.7%, interest rates at 4% and a -33% fall in UK house prices; a scenario more severe than the financial crisis

The second dealt with weak growth and falling trade, low bank rates and increased competition.

The BoE noted, however, that Barclays and Royal Bank of Scotland (RBS) were only able to pass the tests because they raised fresh capital during 2017.

BoE Governor Mark Carney has said that UK residents should feel confident in the health of the economy, after the Financial Policy Committee (FPC) concluded that;

‘The UK banking system could continue to support the real economy through a disorderly Brexit.’

However, the impact of this good news has been somewhat dampened by the latest Organisation for Economic Co-operation and Development (OECD) Economic Outlook.

The latest round of global growth projections are downbeat on the future of the UK economy, with the OECD noting;

‘In the United Kingdom, the growth slowdown is expected to continue through 2018, due to continuing uncertainty over the outcome of negotiations around the decision to leave the European Union and the impact of higher inflation on household purchasing power. In this context, the UK is projected to grow by 1.5 percent this year, 1.2 percent in 2018 and 1.1 percent in 2019.’

EUR Pinned in Place by Approaching US Data as OECD Outlook Signals Good Times Ahead for Eurozone

The latest global growth projections have been much more positive for the Eurozone, showing that that currency bloc is expected to continue recording strong growth levels over the next two years.

According to the OECD press release;

‘The euro area is projected to grow at a 2.4 percent rate in 2017 and a 2.1 percent pace in 2018 – upward revisions from previous projections driven by stronger growth in key European countries – before slowing to a 1.9 percent pace in 2019.’

‘Germany is forecast to grow by 2.5 percent in 2017, 2.3 percent in 2018, and 1.9 percent in 2019. France is projected to grow by 1.8 percent over the 2017-18 period and 1.7 percent in 2019, while Italy will see a 1.6 percent growth rate this year, a 1.5 percent rate in 2018 and a 1.3 percent rate in 2019.’

‘The revised projections reflect stronger-than-expected performance in the first half of 2017, in the context of rising employment, accommodative monetary policy and stronger consumption growth and investment.’

However, the approach of key US data, coupled with a testimony from Jerome Powell at his Confirmation Hearing to become Federal Reserve Chair next year, is keeping the Euro on soft form.

Will Today’s US Economic Data Give EUR a Boost Against GBP?

The day’s UK data has already been released, leaving the Pound to react to the results of the BoE stress tests and the latest OECD Economic Outlook.

Although the German GfK consumer confidence survey results for December are set for release at midday, markets will wait for the day’s US developments to conclude before deciding how to act upon the Euro.

The US advance goods trade balance for October and the consumer confidence index for November will sandwich Jerome Powell’s testimony before the Senate Banking panel this afternoon.

Markets will be looking for any hints that suggestion how, or if, Powell intends to depart from the current monetary policy course set by current Fed Chair Janet Yellen.

If today’s US figures are poor and Powell seems dovish – or remains tight-lipped – the Euro could rise sharply against the Pound.

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TAGS: Pound Euro Forecasts