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EUR/GBP Exchange Rate Tumbles despite Conflicting UK Growth Outlook

January 22, 2018 - Written by John Cameron

Conflicting UK Growth Forecasts Fail to Limit Pound (GBP) Exchange Rates

The Pound Euro (GBP/EUR) exchange rate soared on Monday, bolstered by upbeat comments from former UK Treasury Minister Lord O’Neil and seemingly unperturbed by the International Monetary Fund’s (IMF) latest downgrade in UK growth forecasts.

Lord O’Neil asserted that downcast expectations regarding the impact of Brexit will likely be entirely ‘dwarfed’ by other, more positive economic figures from the UK.

He stated:

‘I certainly wouldn't have thought the UK economy would be as robust as it currently seems. That is because some parts of the country, led by the North West, are actually doing way better than people seem to realise or appreciate. As well as this crucial fact, the rest of the world is also doing way better than many people would have thought a year ago, so it makes it easier for the UK’.

He also asserted that the Mayor of London’s economic assessment on the impact of Brexit would easily be overcome by growth led by the North West as well as strengthening global growth.

This outlook directly contrasted the outlook of the IMF, however, with the group today downgrading their outlook for UK growth in 2019 (the year of Brexit) from 1.6% to 1.5%.

Nonetheless, markets seemed predominantly concerned the former, with EUR/GBP remaining firmly in the Pound’s favour.

German Coalition Talks Move Ahead, EUR Exchange Rates Fail to Capitalise

Germany’s Social Democratic Party (SPD) have successfully voted to begin formal coalition negotiations with Chancellor Angela Merkel’s Christian Democratic Union (CDU), news that helped ease concerns that the SPD might reject plans for a new grand coalition.

This news came after various senior SPD members had criticised party plans in the recent negotiation blue-print, effectively calling for compromise on Merkel’s part in regards to policies on pollution and immigration.
These criticisms seemed to have eased, however, effectively keeping calls for a return to the polls at bay (for now).

Merkel shared her optimism on the outcome of the vote, stating:

‘We are doing (coalition talks) in order to bring the people in our countries even closer together. And we do it to give the whole of Europe a new boost, to make it even stronger’.

This news proved ineffective in bolstering the EUR/GBP exchange rate, however, with markets still sensitive to the possibility that talks could fail at any juncture.

EUR/GBP Exchange Rate Forecast: Volatility Likely on Looming ECB Rate Decision

The Euro Pound (EUR/GBP) exchange rate could become increasingly volatile this week depending on the outcome of Thursday’s European Central Bank (ECB) rate decision.

Whilst markets are not expecting any change to interest rates - with the ECB historically continuing to prove dovish and inflation rates in the bloc similarly disappointing – revelations may come in the form of remarks from ECB President Mario Draghi.

Draghi has previously stated that the ECB could ‘revisit its policy message soon’, news that has led many to wonder if the ECB will make good on this statement and adjust at the imminent meeting.

This could mean that the bank is looking to adopt a reduced focus on bond purchasing, or perhaps prepare for the possibility of tighter monetary policy in 2019 – both events that could bolster the EUR/GBP exchange rate.

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