GBP to EUR Exchange Rate Falls from Highs as UK Politics Return to Market Focus

January 29, 2018 - Written by David Woodsmith

STORY LINK GBP to EUR Exchange Rate Falls from Highs as UK Politics Return to Market Focus

Strong UK data over the last week has done little to give the British Pound to Euro exchange rate a lasting boost, as Euro investors continue to expect strong performance from the Eurozone in 2018 and UK political concerns about the domestic government and Brexit have risen again causing fresh Pound weakness.

Last week was eventful for GBP/EUR as it briefly soared from the week’s opening level of 1.1336 to a six month high of 1.1502. However, the pair was unable to hold its best levels due to perceived European Central Bank (ECB) hawkishness and closed the week at 1.1391. The pair slipped on Monday.

GBP Strength Limited by Domestic Political Uncertainty

While Sterling was supported by strong domestic data last week, the Pound to Euro exchange rate fell back from its best levels in the latter half of the week and fluctuated when markets opened on Monday.

This is because while Britain’s economy looks to have been more resilient during the Brexit process than expected so far, the Pound has been kept under pressure by renewed political uncertainties.

Over the weekend, reports emerged suggesting that UK Prime Minister Theresa May could potentially face a vote of no-confidence from her Conservative Party if she does not offer further clarity on the UK government’s Brexit position soon.

The UK government’s fissure over Brexit hit headlines again last week due to news that Downing Street had seemingly distanced itself from UK Chancellor Philip Hammond’s comments favouring a ‘soft Brexit’.

On top of this, the House of Lords is preparing to discuss the EU withdrawal bill this week and has already offered up criticism of the bill. Peers have said that the bill may need significant rewrites.

According to Connor Campbell from Spreadex;

‘With little else to focus on investors turned their attention to Theresa May’s most recent bout of Tory turbulence, much to the pound’s displeasure. …

… Add onto that the Lords constitution committee labelling the EU withdrawal bill as ‘fundamentally flawed’ just one day before the legislation is set to be debated, alongside a warning from EU leaders that the UK is ‘not ready’ to secure a divorce deal, and there was plenty for the previously soaring pound to fret about.’

As a result of the latest uncertainties facing the UK government and the EU withdrawal bill, Sterling was not as appealing as last week and its strength faded.

EUR Investors Anticipate Inflation Data Following European Central Bank Meeting

The Euro saw a surge in demand last week, following the European Central Bank’s (ECB) January monetary policy decision.

While the bank left monetary policy frozen as expected, markets were relatively surprised by the optimistic tone taken by European Central Bank President Mario Draghi during the bank’s press conference.

Draghi acknowledged that Eurozone growth continued to be better than expected. He also predicted that inflation in the bloc would be steady over the next few months.

Notably, the bank had previously forecast that Eurozone inflation was slow considerably in 2018. As inflation may also be beating bank expectations, investors are now even more highly anticipating Wednesday’s upcoming Eurozone inflation projections.

GBP/EUR Forecast: Key Eurozone Ecostats in Focus

The Pound to Euro exchange rate is likely to be influenced by UK political developments and Eurozone ecostats in the coming sessions.

As this week’s UK economic calendar is quieter, Pound investors are instead turning their attentions to political and Brexit news.

Investors will be eager to see if the latest divisions in the UK government have any notable impact on the Brexit process – as well as of course the discussion on the EU withdrawal bill from the House of Lords.

As for the Euro, influential data due in the coming days is likely to influence the shared currency.

Tuesday will see the publication of the Eurozone’s Q4 Gross Domestic Product (GDP) projections, as well as January business and consumer confidence results.

Wednesday’s data will be even more influential as January’s Eurozone Consumer Price Index (CPI) projections will be published.

If Eurozone inflation beats expectations the Euro could strengthen further, as investors will become increasingly optimistic about the possibility that the European Central Bank (ECB) will take a more hawkish tone on monetary policy sooner than previously expected.

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TAGS: Pound Euro Forecasts