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Pound Euro (GBP/EUR) Exchange Tumbles on Brexit-related Uncertainties

February 28, 2018 - Written by John Cameron

Pound (GBP) Exchange Rates Fall as UK PM Theresa May Rejects EU’s Draft Option for Northern Ireland

The Pound Euro (GBP/EUR) exchange rate tumbled on Wednesday as markets responded to news that the European Union’s latest Brexit withdrawal draft has been rejected by the UK Prime Minister Theresa May - with dissent spread broadly amongst politicians.

The draft legal agreement proposes a ‘common regulatory area’ following Brexit that would keep Northern Ireland within the customs union, leave them subject to the European Court of Justice and effectively annex Northern Ireland from the UK.

May responded by rejecting the proposal, stating:

‘The draft legal text the commission have published would, if implemented, undermine the UK common market and threaten the constitutional integrity of the UK by creating a customs and regulatory border down the Irish Sea, and no UK prime minster could ever agree to it’.

Beyond this, EU Chief Negotiator Michel Barnier has highlighted that there are still significant disagreements between the European Union and the United Kingdom regarding the terms of the transition, impasses that threaten to the delay trade talks that were originally scheduled to begin in March.

In other news, consumer confidence in the UK ebbed in February, falling as more consumers expressed a gloomy outlook for their household finances and the wider economy.

According to the research house GfK, consumer confidence dropped to a score of -10, down from the previous reading of -9 but consistent with the forecasts.

This was largely due to the ongoing high levels of inflation and meagre growth in household incomes.

Eurozone Inflation Dips to Weakest Level Since 2016, GBP/EUR Exchange Rate Fails to Capitalise

Inflation in the bloc fell to its lowest level in more than a year in February, though the core inflation reading surprisingly remained steady.

According to the latest estimates from Eurostat, consumer prices in the Eurozone increased by 1.2% year-on-year this month, down from the previous period’s print of 1.3%.

The core reading remained at 1.0%, however.

This marked the 3rd consecutive fall in Eurozone inflation readings in a row, pushing the reading even further away from the European Central Bank’s (ECB) target of 2%.

It should be stressed, however, that markets have largely grown accustomed to the fact that the central bank will not be adjusting its policy for the foreseeable future and this news, whilst pertinent, largely played second-fiddle to the latest Brexit-related conundrum for GBP/EUR.

In other, slightly more positive news, Germany’s unemployment rate remained steady at historic lows of 5.4% in February, though the number of people out of work fell by 22,000.

BA Chief Detlef Scheele shared his thoughts:

‘The positive development in the labour market continues in February. Demand for workers remains at a very high level’.

It is clear that Germany’s economy continues firing on all cylinders – bolstered by a strong appetite for German goods abroad as well as at home.

Pound Euro (GBP/EUR) Exchange Rate Forecast: Could the BoE be Preparing for a Rate Hike in may?

The Pound Euro (GBP/EUR) exchange rate could claw back some losses as we move towards May, depending on the sentiment revealed by members of the Bank of England’s (BoE) Monetary Policy Committee (MPC).

Anticipation has been steadily building after recent hawkish comments from BoE Deputy Governor Dave Ramsden, who recently asserted that accelerated wage growth in the UK could warrant an increase in the UK’s interest rate sooner, rather than later.

Beyond this, Capital Economics, an independent economic research association, have announced that they expect the UK’s economy to growth by 2% in 2018, citing ever-buoyant inflation and accelerated wage growth as factors that will drive the interest rate higher and higher.

It should be noted, however, that the BoE has historically claimed that one of the deciding factors in raising interest rates earlier than planned would be sufficient progress being made on the Brexit negotiation front.
In this respect, further disagreements between London and Brussels could push the central bank towards caution.

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