Pound Euro Exchange Rate Recovers Ground Despite Lingering Brexit Jitters

March 1, 2018 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate Recovers Ground Despite Lingering Brexit Jitters

The Pound to Euro (GBP/EUR) exchange rate has come under significant pressure after the EU published its first draft of the Brexit withdrawal treaty.

While the draft yielded no significant shocks this was still enough to weigh down the Pound on Wednesday, with Brexit-based jitters picking up once again.

This helped to mitigate the impact of a fresh decline in the Eurozone consumer price index, even though inflation within the currency union eased to 1.2% on the year in February.

A surprise contraction in the latest Nationwide housing price index data added to the bearishness of GBP exchange rates today, underlining worries over the health of the UK economy.

Relatively Steady UK Manufacturing PMI Limits GBP EUR Exchange Rate Weakness

However, the weakness of GBP exchange rates was somewhat limited on Thursday morning thanks to a better-than-expected UK manufacturing PMI.

As the measure showed only a slight loss of momentum within the manufacturing sector, dipping from 55.3 to 55.2, this encouraged the Pound to recover some ground.

Although doubts remain over the outlook of the UK economy this latest sign of resilience offered investors some encouragement, even though the outlook remains rather uncertain in the months ahead.

As January's net consumer credit figure fell short of forecast this offered some additional support to the GBP/EUR exchange rate, boosting hopes that the Bank of England (BoE) could still be on track to raise interest rates sooner rather than later.

Speculation over Brexit is likely to remain a major headwind for the GBP/EUR exchange rate in the near term, though, with markets bracing for the latest speech from Prime Minister Theresa May.

Viraj Patel, Research Analyst at ING, commented:

'We believe GBP’s decline this week is more Brexit sentiment driven – rather than a reassessment of UK economic fundamentals – and point to the 2-3 year part of the UK rate curve staying fairly resilient. History suggests that under such episodes, GBP has the propensity to correct more sharply if we get any good news. We’ll need a catalyst, but risk-reward favours not chasing Brexit sentiment driven moves lower in GBP. Look for consolidation in GBP ahead of PM May’s speech (Friday).'

Unless May adopts a softer, more conciliatory tone over Brexit the Pound still looks vulnerable to further declines heading into the weekend.

Euro Exchange Rates Vulnerable Ahead of Latest Italian and German Votes

Political jitters are likely to increasingly weigh on the Euro in the coming days, with the latest Italian election and the future of the German coalition government to be decided on Sunday.

There is still a risk that Italy could see more of a swing to the right in this election, potentially creating risks over the future integrity of the currency union.

Any significant gains for the Five Star Movement could encourage investors to pile out of the single currency once again on Monday.

Focus will also fall on the results of the SPD poll, which will decide whether Angela Merkel's grand coalition will see another term in government.

As Carsten Brzeski, Chief Economist at ING, noted:

'More than 460,000 SPD members had the chance to vote on whether or not the party should join another grand coalition with Angela Merkel’s CDU on the basis of the negotiated coalition agreement. The result of the vote will be announced on Sunday. The outcome of this vote is in our view highly uncertain. Remember that the SPD party assembly only voted with a majority of some 56% in favour of starting the coalition talks. The party’s grassroots are expected to be more sceptical. Also, more than 20,000 people have joined the party since the beginning of the year, most of them with probable intention to vote against a grand coalition.'

If the SPD fails to approve the coalition deal this would plunge the Eurozone's powerhouse economy into fresh political turmoil, to the detriment of the Euro.

On the other hand, EUR exchange rates could see another rally if the German political situation finally stabilises after several months of uncertainty.

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TAGS: Euro Forecasts Euro Pound Forecasts