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Pound Euro Exchange Rate Recovers from Monday Slip as Eurozone Economic Sentiment Slumps

November 13, 2018 - Written by Tim Boyer

Fears that UK-EU Brexit negotiations could collapse or that UK Parliament could block a potential Brexit deal even if one is reached has kept major pressure on the British Pound to Euro (GBP/EUR) exchange rate, but some strong UK data and concerning Eurozone data has made it easier for the pair to hold above its worst levels.

Due largely to hopes that a UK-EU Brexit deal can be reached soon, GBP/EUR has been edging higher in recent weeks. Last week saw GBP/EUR climb from 1.1390 to 1.1442, briefly touching a six month high of 1.1504. Following a brief dip on Monday, GBP/EUR recovered and trended closer to the level of 1.1482 at the time of writing on Tuesday.

GBP Finds some Ground on Brexit Hopes and Rising UK Wages

Sterling volatility has worsened so far this week, as mixed Brexit reports and speculation leave markets hesitant to begin any prolonged moves higher or lower.

Monday’s Pound movement included reaction to claims that even UK Prime Minister Theresa May’s government Cabinet doubted the likelihood that the so-called Brexit ‘Chequers plan’ would be able to pass through UK Parliament.

Other Brexit reports included speculation that the UK may miss its chance to reach a Brexit deal before the end of the month due to lasting deadlock over the issue of Ireland’s border.

These reports limited demand for the Pound, despite other reports claiming that the UK and EU were in the final stages of negotiations and were edging closer to a formal deal.

Still, hopes for Brexit progress as well as Tuesday’s UK job market data helped the Pound to recover slightly today.

Tuesday saw the publication of Britain’s latest job market results, which were mixed but did contain some optimistic signs.

Britain’s average earnings stats for the three months into September showed that wages beat expectations in the figure excluding bonuses. The figure was expected to remain at 3.1%, but instead edged higher to 3.2%.

The Pound’s benefit from this data was limited though and much of Tuesday’s Pound recovery was also due to weakness in the Euro.

Analysts noted that other parts of the report were more concerning, indicating that employers were struggling to find new workers despite the rising number of job vacancies.

Britain’s key unemployment rate also unexpectedly worsened from 4.0% to 4.1%.

EUR Slumps on Political Jitters and Concerning Eurozone Stats

A broad lack of appeal in the Euro was one of the causes of the Pound to Euro exchange rate’s Tuesday morning recovery.

Eurozone data continued to indicate that the Eurozone economic was slowing notably, while political jitters returned amid expectations that Italy would not be majorly revising its budget plans.

A few weeks ago, the EU rejected Italy’s budget plans after Italy’s anti-establishment government insisted on a budget that would boost government spending and borrowing in an effort to stimulate Italy’s economy.

Italy’s government has shown no signs that it will change its budget to suit the EU’s outlines, and today is the deadline for Italy’s chance to present a new budget plan.

Germany’s final October Consumer Price Index (CPI) report had no notable impact on the Euro as the data met expectations, but ZEW’s latest economic sentiment results for the Eurozone and Germany were concerning.

While Germany’s economic sentiment print beat forecasts slightly, Eurozone economic sentiment unexpectedly plunged to -22.0 while Germany’s current conditions print slumped from 70.1 to 58.2, well below the forecast 65.0.

Lastly, perceived monetary policy divergence is weighing on the Euro after the Federal Reserve’s relatively hawkish stance last week.

GBP/EUR Forecast: Eurozone Growth Could Offer Euro Support if it Impresses

Wednesday may be a busy day for the Euro, depending on how Italy’s budget tensions with the EU continue to unfold.

Assuming Italy does not make requested changes to its budget, the EU may respond by placing sanctions on Italy.

If the EU’s reaction to the Italy is even more strict than expected it could worsen Italian Euroscepticism fears and leave the Euro weaker.

On the other hand, in the event that Italy and the EU are able to reach some kind of agreement on the budget the Euro would see a solid boost in demand.

As well as reaction to Italy-EU tensions, the Euro could be driven by upcoming key German and Eurozone growth data.

Eurozone growth is expected to have slowed notably in Q3, from 0.4% to just 0.2% quarter-on-quarter. If the growth rate beats expectations though, the Euro could see stronger demand.

Meanwhile, the Pound is most likely to react to any potential Brexit developments but the UK inflation rate report due on Wednesday could also cause some Pound to Euro exchange rate movement.
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