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Poor Eurozone Output Data Pushes GBP/EUR Exchange Rate Up by 0.3% Today

June 8, 2018 - Written by James Fuller

On Thursday, the Pound to Euro (GBP/EUR) exchange rate opened in the region of 1.1391 and closed lower around 1.1377.

This minor decline was caused by GBP trader uncertainty about the potential resignation of Brexit Secretary David Davis.

The issue at hand was the Brexit ‘backstop’, which is a planned ‘safety net’ policy that will prevent a hard Irish border if negotiators fail to reach an agreement.

While it might never be used, Mr Davis took issue with the seemingly indefinite timeframe for the backstop, which implied that the UK would be tied to the EU for an indeterminate period despite ‘leaving’ the multinational union.

The fear was that because of Mr Davis’ objection to the loose timeframe, he could resign from office in protest against Prime Minister Theresa May.

The situation was eventually resolved with Mr Davis keeping his job and Downing Street claiming that a firm time limit on the backstop had been created.

Political analysts were less confident, with some concluding that the new time limit was vaguely defined and that EU negotiators could reject the backstop deal anyway.

Ending the day’s storm in a teacup, European Parliament spokesman on Brexit Guy Verhofstadt said:

[It is] difficult to see how [the] UK proposal on customs aspects of Ireland/Northern Ireland backstop will deliver a workable solution to avoid a hard border and respect [the] integrity of the single market/customs union.

‘A backstop that is temporary is not a backstop, unless the definitive arrangement is the same as the backstop.’

On the other side of the pairing, the Euro appreciated thanks to signs that there could be European Central Bank (ECB) monetary policy tightening.

ECB official Peter Praet suggested that the ECB’s longstanding quantitative easing bond-buying program could be coming to an end, which would open the door to an interest rate hike from the central bank.

GBP/EUR Exchange Rate Rises despite Boris’ ‘Meltdown’ Remarks

The Pound (GBP) has advanced against the Euro (EUR) today, although the latest UK news hasn’t supported Sterling.

Instead, the latest GBP/EUR exchange rate rise has been caused by a converse weakening of the Euro.

On the UK side, leaked remarks from Foreign Secretary Boris Johnson suggest that Brexit might not be quite as smooth as first hoped.

Speaking at an event for a Conservative campaign group, Mr Johnson warned that there could be a Brexit ‘meltdown’ but that it shouldn’t be cause for panic.

This contrasts sharply with Mr Johnson’s strong support of the ‘Leave’ campaign in the 2016 EU Referendum and has limited today’s GBP/EUR exchange rate gains.

EUR/GBP Exchange Rate Slides on Poor Production Data

Today’s Euro to Pound (EUR/GBP) exchange rate losses have been caused by disappointing Eurozone economic data.

Industrial production figures for April have shown falling output from both France and Germany; the seasonally-adjusted German trade balance has additionally shrunk beyond initial estimates.

Summing up the poor German data, VP Bank Chief Economist Thomas Gitzel said:

‘The German economy will only make timid headway in the second quarter.

‘Weak industrial orders, weak exports and disappointing industrial production are a bitter setback.’

GBP/EUR Exchange Rate Forecast: Are Pound to Euro Gains ahead on UK Earnings and Inflation Data?

Looking ahead to the coming week, the Pound (GBP) could turn volatile against the Euro (EUR) when UK earnings and inflation data comes out.

Tuesday’s wage stats are forecast to show a steady pace of growth during April, with and without bonuses included.

If the pace of wage growth accelerates above forecasts, the Pound could rise sharply against the Euro.

Rising wage growth suggests that the UK economy is more resilient, which in turn means that a Bank of England (BoE) interest rate hike is more likely.

Keeping the BoE in mind, Wednesday’s UK inflation rate figures for May might also boost the Pound because of the implications for BoE activity.

Higher year-on-year inflation is forecast; if this is an accurate prediction then the GBP/EUR exchange rate could rise because it would add pressure on the BoE to hike interest rates.

The main event for Euro traders will be Thursday afternoon’s European Central Bank (ECB) monetary policy meeting.

If ECB officials suggest that quantitative easing is finally coming to an end then the Euro could rally, even if this is the only notable remark.

ECB interest rates have remained at 0% since March 2016 and Euro traders have long been looking for signs that rates could rise again.

A wind-down of quantitative easing wouldn’t happen overnight, but if it looks like it could happen over the remainder of 2018 then the Euro could rally against the Pound.
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