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GBP to EUR Exchange Rate Advances Limited by Brexit Uncertainties

March 12, 2018 - Written by Ben Hughes

Following some late-week advances last Friday, the British Pound to Euro (GBP/EUR) exchange rate appeared to continue its advance during Monday’s European session. While the Euro was under pressure, uncertainties about the Brexit process kept a cap on Sterling gains and this is likely to continue.

Last week saw GBP/EUR mostly trending within a relatively tight region. The pair opened the week at the level of 1.1205 and closed at 1.1253. On Monday GBP/EUR briefly touched on a weekly high of 1.1297 but generally trended closer to 1.1275 towards the end of the European session.

GBP Strength Capped as Brexit Uncertainties Continue to Weigh

A lack of supportive UK data and uncertainties ahead of key UK-EU talks later in March have given investors little reason to buy the Pound so far this week.

Instead, investors are awaiting developments regarding UK fiscal policy expected in Tuesday’s UK Spring Statement.

Some analysts speculate that Sterling may not even see much movement on economic news until the summit is over. According to Morten Helt, currency strategist from Danske Bank;

‘We expect Euro/Sterling to be very volatile in the run up to the summit due to the conflicting headlines we have seen in recent weeks and as such we remain cautious on the British currency’s outlook,’

Last week’s news had little influence on the Pound outlook.

EU Council President Donald Tusk took a strict stance on UK-EU negotiations by instructing negotiators that the UK would not be able to have a bespoke Brexit deal as it is leaving the customs union and the EU single market.

UK Chancellor Philip Hammond maintained confidence that the UK would be able to negotiate a bespoke deal on issues like the UK financial sector, despite Tusk’s strict stance.

This has left investors hesitant to make any major moves on Sterling, at least not until more concrete Brexit developments.

Uncertainty about whether or not there will be a Brexit transition period, or whether there will be a ‘hard’ or ‘soft’ Brexit, is likely to keep the Pound relatively range bound against the Euro for now.

EUR Fails to Hold Ground as ECB’s Coeure Takes Dovish Stance

European Central Bank (ECB) officials continued attempts to keep pressure on the recently strong Euro on Monday. ECB Executive Board Member Benoit Coeure intended to dampen any market hawks hoping for higher Eurozone interest rates any time soon.

While last week saw the ECB indicate it was no longer considering ramping up quantitative easing (QE), Coeure stated on Monday that he expected rates to remain low in the short-term too. He told French radio station BFM Business;

‘It is very clear to us that short term interest rates, the ones that are controlled by the central bank, will remain at very low levels, far beyond the horizon of our asset purchases, …

… Inflation is not quite where we would like it to be,’

As the cautiousness of ECB officials including ECB President Draghi last week has kept pressure on the Euro, it has been unable to benefit from solid Eurozone ecostats. Instead, investors are anticipating Eurozone inflation stats in the coming days.

GBP/EUR Forecast: UK Spring Statement and Eurozone Inflation Ahead

Tuesday could be this week’s most influential session for the Pound, as the UK Treasury will be holding its Spring Statement.

UK Chancellor Philip Hammond is expected to discuss updates to UK fiscal policy, as well as the latest economic forecasts for the nation.

If UK forecasts or fiscal policy news impresses investors, Sterling could strengthen. However, if Brexit uncertainty paints a cloud of gloom over UK forecasts the Pound’s strength is likely to remain limited instead.

The Euro is more likely to drive GBP/EUR trade regardless, as the shared currency’s outlook could be notably affected if upcoming Eurozone inflation data surprises investors.

February’s final Spanish Consumer Price Index (CPI) results will be published on Tuesday, followed by German data on Wednesday, French data on Thursday and finally the Eurozone’s overall inflation results on Friday.

Eurozone inflation is currently forecast to have improved from -0.9% to 0.2% month-on-month but slip from 1.3% to 1.2% year-on-year. Core inflation is forecast to remain at 1%.

If the yearly inflation or core inflation rates beat expectations it could boost hawkish European Central Bank (ECB) speculation. This would make the Euro much more appealing.
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