GBP EUR Exchange Rate Strengthens on Increased Market Optimism Over Brexit

December 18, 2017 - Written by Frank Davies

STORY LINK GBP EUR Exchange Rate Strengthens on Increased Market Optimism Over Brexit

The Pound Euro exchange rate rallied at the start of the week, with investors taking comfort from the prospect of Theresa May’s cabinet formally discussing the UK’s future trade deal with the EU for the first time.

This encouraged Sterling to trend sharply higher across the board, boosting hopes that markets will soon get a greater sense of clarity over the government’s Brexit plans.

However, there is still a significant degree of division within the cabinet over the nature of the future trade relationship with the EU, creating the potential for further market jitters down the line.

While the Euro also saw increased demand, thanks to an optimistic monthly report from the Bundesbank, this was not enough to prevent the GBP EUR exchange rate making some robust gains.

GBP EUR Exchange Rate Remains Vulnerable to Brexit Jitters

Speculation over Brexit is likely to continue to dominate the outlook of GBP exchange rates for the foreseeable future, with Parliament still debating related legislation.

As researchers at BBH commented:

‘In a narrow vote, Parliament secured the right to grant final approval. Another confrontation and possible defeat could be avoided in the week ahead if the specific date of 31 March 2019 can be removed from withdrawal bill.

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‘Given that Q1 18 will be spent discussing the transition period, a hard date may make that period more difficult. It is in the EU's interest to argue for a standstill agreement; this is one that keeps the UK firmly in the EU's rules and regulations, while the UK would be technically out of the EU. It also seems widely recognised that the Irish border issue has not been resolved in any meaningful way, implying that it could emerge again as a formidable challenge.’

Unless there are signs of a greater consensus emerging over key Brexit issues then the GBP EUR exchange rate could come under renewed downside pressure.

Even so, the Pound could find some support on the back of the CBI reported sales figures for December.

Providing the economy shows signs of improving health GBP exchange rates could find a fresh rallying point, even though a significant degree of economic uncertainty remains.

On the other hand, a fresh dip in sales could put renewed pressure on Sterling, underlining a general weakening in confidence within the UK economy.

Euro Vulnerable as German Politics Remains in Limbo

EUR exchange rates may struggle to sustain a positive outlook in the coming days, with questions still hanging over the future of the German government.

Considering the political situation, researchers at BBH noted:

‘In Germany's way, there will be exploratory talks first. These can talk several weeks. Merkel does not want to lead a minority government. The SPD does not want to lose its identity in another coalition government. Both blocs do not want to return to the polls. In the September election, both saw their public support fall to post-WWII lows.

‘A type of arrangement where the SPD and CDU/CSU agree on several broad programs and then fight for the rest of the agenda in the Bundestag seems like a minority government. However, it may be the basis of a compromise. It allows the SPD to still be the main opposition party (rather than the AfD) and draw the parliamentary privileges associated with it.’

Even so, focus is more likely to fall on December’s German IFO business sentiment surveys in the near term.

So long as businesses maintain a relatively optimistic view this could encourage the Euro to trend higher, adding weight to expectations that the Eurozone’s powerhouse economy will motor on in spite of political uncertainty.

Investors may also be encouraged if October’s Eurozone construction output figures prove positive.

While the European Central Bank (ECB) looks set to leave monetary policy on hold over the coming months a stronger showing here could still bolster the appeal of the single currency.

On the other hand, any signs of slowing momentum may offer the GBP EUR exchange rate further support.

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TAGS: Pound Euro Forecasts