Rattled Traders Buy into EUR/GBP Exchange Rate after Brexit Jitters

December 11, 2017 - Written by Tim Boyer

STORY LINK Rattled Traders Buy into EUR/GBP Exchange Rate after Brexit Jitters

Last week, the Euro made a minor overall loss against the Pound. The EUR/GBP exchange rate opened in the region of 0.8804, but later closed lower at 0.8792 on Friday.

Euro Gains Ground despite Italian Sales Slump

The Euro has advanced against the weaker Pound today, in spite of a mixed set of Eurozone data coming out over the morning.

Good news came from Ireland, which posted a forecast-beating rise in construction activity during November.

On the other hand, however, Italian retail sales were negative in November, while Greece also saw a sharp slowdown in industrial output.

The Greek trade deficit also expanded in October, by more than expected.

The underlying positive factor here was a speech by European Central Bank (ECB) official Daniele Nouy.

The ECB policymaker spoke optimistically about economic growth in the Eurozone, citing a number of bank merger plans currently in the pipeline.

GBP/EUR Exchange Rate Drops over Irish Border Confusion

The Pound has seen a small drop against the Euro today, owing to recurrent fears about the Brexit process.

Last week brought high drama, as the Democratic Unionist Party (DUP) effectively blocked initial UK plans for the Irish border after Brexit.

The DUP’s last-minute objection panicked Pound traders, as it exposed the party’s strong influence on the Conservative government through the tenuous support agreement made after the 2017 general election.

Regardless of the hurdles, the Pound still rose against the Euro late last week when EU Commission President Jean-Claude Juncker stated that the UK had made ‘sufficient progress’ in Brexit talks.

Juncker indicated that the UK might be able to finally start discussing post-Brexit trade in early 2018, although under the caveat of the remaining 27 EU members also granting the UK a pass on Brexit progress.

Problematically, over the weekend UK Brexit Secretary David Davis claimed that the UK’s draft deal with the EU was not ‘legally enforceable’ and merely a ‘statement of intent’, which implies a great deal of variability in the future.

Davis has since furiously backtracked and restated the UK’s commitment to the Irish border deal, saying;

‘What I actually said yesterday, in terms, was we want to protect the peace process, we want to protect Ireland from the impact of Brexit for them.

And I said this was a statement of intent which was much more than just legally enforceable.

In other words, of course it is legally enforceable under the withdrawal agreement.

This might have preserved Davis’ reputation to some, but the Irish government remains sceptical.

The pressure is therefore on for the UK to score a Brexit goal later in the week, when EU leaders meet to discuss the UK’s current progress in negotiations.

Euro to Pound Rate could Drop on Disappointing German Data Releases

The Euro might have a difficult week going ahead, as two key data releases from Germany are predicted to print negatively.

ZEW’s economic sentiment reading for December is forecast to show a decline during the month, which might be due to the ongoing German political crisis.

Additionally, German PMI activity measures are expected to show slowing activity on Thursday, alongside a Eurozone-wide activity decline.

That said, the Pound could remain a weaker currency throughout the week, enabling steady EUR/GBP gains.

Major UK data will come over Tuesday to Thursday, covering inflation, average earnings and a Bank of England (BoE) interest rate decision.

With regards to inflation and earnings, higher inflation and lower earnings could batter the Pound.

Such results would indicate that the UK wage squeeze is worsening, which would be especially bad in the run-up to the Christmas spending spree.

As it is, economists believe that annual inflation will remain high at 3%, but that wage growth will start to pick up by hitting 2.5% excluding bonuses.

The BoE isn’t expected to change interest rates, but could still provide feedback on Brexit talks so far.

Further ahead, the main event will be the EU summit over 14th and 15th December.

If EU leaders agree that the UK has done enough in initial Brexit talks to move onto ‘phase two’, the Pound could rise sharply against the Euro.

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TAGS: Euro Pound Forecasts