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Pound to Euro Forecast: Second Week of Exchange Rate Losses as Brexit Uncertainties Build

December 7, 2018 - Written by Toni Johnson

The British Pound to Euro exchange rates have been unable to benefit from weakness in the single currency or brief rises in speculation that the Brexit process could be somehow avoided altogether.

Since opening this week at the level of 1.1265, GBP/EUR has trended with a significant downside bias. GBP/EUR touched a two month low of 1.1186 earlier in the week and failed to sustain any recovery attempts. At the time of writing on Friday, GBP/EUR trends near the level of 1.1212.

Pound Sterling (GBP) Exchange Rates Unappealing amid Uncertainties as Parliament’s Brexit Vote Approaches

For most of the past week, the Pound has been fluctuating widely as investors briefly buy the currency on soft Brexit hopes, before selling again as Brexit jitters worsen.

The Pound has become increasingly unstable and volatile as markets highly anticipate a major Brexit vote set to take place in UK Parliament next week – on the 11th of December.

Analysts are widely expecting that the deal will fail to pass through UK Parliament – this has widely been priced into Sterling already.

The huge uncertainty is what follows, as Parliament is expected to take more control over the next steps in Brexit following an amendment Parliament voted for in the past week.

Many potential outcomes follow, including the removal of UK Prime Minister Theresa May’s government, potential attempts at renegotiation, a worst-case scenario ‘no-deal Brexit’ or even a second referendum.

With mere months until the formal Brexit date in March 2019, this significant uncertainty about how the deal will turn out is leaving the Pound massively unappealing.

UK Prime Minister Theresa May had been under pressure to delay the Parliament vote in order to attempt to bolster the popularity of her deal. According to Ulrich Leuchtmann, FX Strategist from Commerzbank in Frankfurt:

‘Volatility is increasing,

It seems the proposed deal is going to be rejected so delaying the vote could be an option for May,’

Speculation that the vote could be delayed was dampened on Friday however, as the UK government denied the possibility.

Euro (EUR) Exchange Rates Benefit from Rival Weakness despite Mixed Eurozone Data

The Euro struggled to capitalise on Pound weakness over the last week. While the shared currency benefitted from weakness in major rivals like the Pound and US Dollar (USD), its potential for gains was limited due to underwhelming Eurozone ecostats.

Aside from the Euro gaining as the Pound fell, the Euro has also climbed thanks to a weakening US Dollar (USD). The US Dollar is the Euro’s biggest rival and the two currencies have a negative correlation.

The Euro has been unable to hold its best levels though, as Eurozone data continues to indicate that the Eurozone’s economic outlook is slowing.

This is also weighing on hopes for the European Central Bank (ECB) to take a more hawkish tone on Eurozone monetary policy any time soon.

Friday saw the publication of Germany’s October industrial production results, which unexpectedly contracted -0.5%.

The Eurozone’s latest Q3 Gross Domestic Product (GDP) growth rate projection was also even lower than expected year-on-year. The figure is now expected to have slowed from 2.2% to 1.6% rather than the previously projected 1.7%.

These stats weighed on the Euro’s appeal, but ultimately the shared currency was still able to climb versus a weak Pound.

Pound Sterling Euro (GBP/EUR) Exchange Rate Forecast: UK Parliament’s Brexit Vote and Eurozone Stats in Focus

Next week is likely to be a highly pivotal one for the Pound to Euro exchange rate, and not least because there are multiple influential UK and Eurozone ecostats due for publication throughout the week.

German and UK trade balance results will be published on Monday, as well as UK Gross Domestic Product (GDP) growth data for October.

UK job stats and Eurozone economic sentiment survey figures will follow on Tuesday, with German inflation and Eurozone PMI projections following towards the end of the week.

The biggest events by far next week however, will be the UK Parliament Brexit vote on Tuesday and the European Central Bank’s (ECB) December policy decision on Thursday.

The UK Parliament vote, especially the aftermath, could significantly influence the path and nature of the Brexit process.

The Pound will be highly volatile and could see some sharp movements as things develop, and the Pound to Euro exchange rate outlook may not firm at all until there is some kind of solid Brexit outlook.
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