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Euro-to-Pound Exchange Rate Edges Higher on Brexit Uncertainties Following Week of Losses

May 21, 2018 - Written by Minesh Chaudhari

Despite Italian political uncertainties and bearish expectations for Eurozone inflation, the Euro to British Pound (EUR/GBP) exchange rate saw a modest recovery on Monday. This was largely due to Brexit and economic uncertainties weighing on Sterling ahead of this week’s key UK data reports.

Italian political uncertainty had a big downside influence on EUR/GBP last week, dragging the pair down from 0.8821 to 0.8742 throughout the week. The pair briefly dipped to a May low of 0.8717 in the middle of the week. On Monday EUR/GBP recovered slightly, but only to around the level of 0.8760.

EUR Demand Limited Amid Persistent Italian Political Uncertainty

The Euro was unable to capitalise against Pound weakness on Monday, as investors had little reason to buy the shared currency either.

Multiple factors weighed heavily on the Euro throughout the day, following a week of poor performance.

Investors are bracing for the increasingly real likelihood that Italy’s next government will be a coalition led by two populist parties, the League party and the 5-Star Movement party.

Both parties have a history of entertaining anti-Euro rhetoric. While neither party platformed on this rhetoric in March’s election, investors are still concerned that Euroscepticism could rise again if a coalition of the parties came into power.

As Italy is one of the major Eurozone nations and the parties have indicated they may ask for the European Central Bank (ECB) to write off Italian debt, Italy’s political news has caused weakness in Euro trade in recent sessions.

The possibility that Italy’s new government may not respect the nation’s debts has concerned even high ranking economists. On Sunday, French Finance Minister Bruno Le Maire said:

‘If the new government took the risk of not respecting its commitments on debt, the deficit and the cleanup of banks, the financial stability of the entire euro zone will be threatened,’

According to David Madden, strategist from CMC Markets:

‘The possibility of a Eurosceptic government in Rome is shaking investor confidence... at this point a larger fiscal deficit and greater bond issuance [in Italy] does seem likely,’

On top of political uncertainties, recent Eurozone data has continued to indicate that the bloc’s inflation rate is still subdued. Broad strength in the Euro’s biggest rival, the US Dollar (USD), has kept additional pressure on the shared currency.

GBP Limp as Investors Anticipate Major Ecostats

The primary reason for the Euro to Pound exchange rate’s modest recovery on Monday was broad weakness in the Pound, caused by fading Bank of England (BoE) interest rate hike bets, a weak UK economic outlook and Brexit uncertainties.

Last week, speculation that the UK government was planning to keep the nation in an EU customs union post-Brexit briefly supported Pound trade.

However, as UK Prime Minister Theresa May played down these reports, the Pound failed to benefit.

Investors were hesitant to buy Sterling on a ‘what if’ soft Brexit scenario, with analysts saying markets were waiting for more solid news or data before going bullish on Sterling.

EUR/GBP Forecast: UK Data in Focus This Week

While some upcoming Eurozone ecostats could influence the Euro to Pound exchange rate, Britain’s stats could be much more influential for the Pound outlook and EUR/GBP.

From Wednesday through Friday, multiple major UK ecostats will be published which could influence Britain’s economic outlook and Bank of England (BoE) interest rate hike bets.

Wednesday will see the publication of Britain’s Consumer Price Index (CPI) results from April, followed by April retail sales on Thursday and the latest UK Gross Domestic Product (GDP) projections on Friday.

According to Jane Foley, currency strategist from Rabobank, UK retail data could be particularly influential for BoE interest rate hike bets:

‘If there is a pickup in retail sales, it will suggest that the impact of the Beast from the East on first-quarter activity could have been significant,

This will also be Sterling-supportive since it would strengthen the view that the BoE could be primed for an August rate hike.’

As for the Euro, Eurozone PMI projections on Wednesday could influence EUR/GBP but Euro investors may be more focused on Italian political developments this week.

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