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GBP EUR Exchange Rate Movement Limited as UK House Prices Dip

January 8, 2018 - Written by James Fuller

As the Halifax house price index showed a surprise contraction on the month in December the Pound Euro (GBP EUR) exchange rate struggled to find any particular momentum.

This latest sign of softness within the UK housing market weighed on the appeal of the Pound, adding to worries over the domestic outlook.

With Halifax also warning that house prices are unlikely to pick up over the course of 2018, thanks to persistent economic uncertainty and the ongoing wage squeeze, there was little reason to favour Sterling on Monday morning.

While the Euro was also softened as a result of Friday’s disappointing Eurozone inflation data this was not enough to boost the GBP EUR exchange rate, leaving the pairing on a narrow trend.

Rising Eurozone Investor Confidence Bolsters Euro Demand

Some degree of support for the Euro came on the back of November’s German factory orders data, which bettered expectations to show growth of 8.7% on the year.

However, as the monthly component was somewhat disappointing, dipping -0.4%, this limited the bullishness of EUR exchange rates.

The upside potential of the single currency remains limited at this juncture thanks to the slim odds of the European Central Bank (ECB) returning to a monetary tightening bias in the near future.

Even so, as the Eurozone Sentix investor confidence index for January climbed from 31.1 to 32.9 this encouraged further demand for the Euro at the start of the week.

As sentiment within the currency union shows further signs of strengthening the downside bias of EUR exchange rates eased, with signs continuing to point towards the Eurozone economy performing well in 2018.

Viraj Patel, Research Analyst at ING, noted:

‘Recent surveys have pointed to buoyant consumer and business sentiment, which suggests that the prospect of tighter ECB policy is not actively weighing on domestic animal spirits. This week’s minutes for the Dec ECB policy meeting (Thu) may show signs of hawkish dissent – with some officials favouring an explicit end to the ECB’s QE bond-buying programme later this year.’

If the ECB minutes highlight a greater sense of hawkishness amongst policymakers this could see the GBP EUR exchange rate lose further ground.

On the other hand, so long as President Mario Draghi continues to favour a more cautious outlook and the maintenance of the quantitative easing program any Euro strength is likely to be limited.

Cabinet Reshuffle Speculation Limits GBP Exchange Rate Strength

GBP exchange rates also saw volatility this morning due to speculation over Theresa May’s imminent cabinet reshuffle.

Investors are keen to see whether the Prime Minister will be able to bolster her position through this exercise, even though the ultimate impact of the reshuffle is expected to be limited.

As Viraj Patel of ING, commented:

‘While in the political sphere, reshuffles hold the equivalent entertainment value of ‘eviction days’ in a popular reality TV show – any fundamental fallout for the Pound seems unlikely from the PM’s team tinkering this week. Key ministers like Chancellor Philip Hammond, Brexit Minister David Davis and Foreign Secretary Boris Johnson are expected to retain their posts – while one should also not read too much into the appointment of a new minister responsible for managing Brexit ‘No Deal’ contingency plans.’

If the reshuffle proves uneventful then the GBP EUR exchange rate could return to a stronger footing, although jitters over Brexit remain a significant drag on Sterling demand.

Focus is likely to shift towards Wednesday’s raft of UK trade and production data, though, with output growth forecast to have gained fresh momentum on the month in November.

So long as the domestic economy demonstrates signs of resilience the mood towards the Pound should improve, at least in the short term.

The NIESR gross domestic product estimate for the fourth quarter of 2017 could offer the GBP EUR exchange rate another rallying point, as the economy is expected to have maintained solid growth of 0.5%.

Any disappointments, however, could encourage investors to sell out of the Pound once again.
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