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Relief: Pound to Euro Exchange Rate Edges Away from Worst Levels despite Persisting Brexit Uncertainties

December 11, 2018 - Written by James Fuller

As UK PM Theresa May rushed around the EU to acquire assurances on some details of her negotiated UK-EU Brexit deal, some investors opted to buy the embattled British Pound to Euro (GBP/EUR) exchange rate back from its worst levels on Tuesday. Sterling’s gains were ultimately limited, despite economic and political uncertainties weighing on the Euro.

After a fall of around a cent last week, GBP/EUR may be in for even deeper losses this week unless the pair is able to recover in the coming days. GBP/EUR opened this week at the level of 1.1175 and has since slumped. GBP/EUR briefly hit a three month low of 1.1010 on Monday before recovering and trending nearer the level of 1.1090 at the time of writing on Tuesday.

Pound Sterling (GBP) Exchange Rate Recovery Limited as Investors Await Brexit Clarity

The Brexit process has increasingly been the focal point of Pound movement in recent weeks.

As Monday’s delay of an anticipated UK Parliament Brexit vote caused a major plummet in the British currency, this looks to continue until some kind of major Brexit clarity is offered.

On Tuesday, some investors opted to buy the British currency back from its cheapest levels. This helped the Pound to recover slightly against a weak Euro, but its gains were ultimately limited as Brexit uncertainties persisted.

UK Prime Minister Theresa May delayed the Brexit vote in order to acquire assurances from EU leaders in the hopes it would boost the popularity of her negotiated UK-EU Brexit deal and make it easier to push through UK Parliament.

Valentin Marinov, Head of G10 FX Research at Credit Agricole, said that the outcome of May’s attempts are likely to influence Sterling next:

‘For investors, the decision to add to their shorts or take profits will depend on the signals we get from Prime Minister May’s meetings,

What we will be hoping for is some clarity on what assurances the EU will be willing to offer’

The UK government indicated on Tuesday that it would hold another vote ahead of the 21st of January, amid mounting criticism from opposing parties and threats of a possible no-confidence vote.

According to analysts at BBVA:

‘With the uncertainty set to remain high in the coming days, the Pound is likely to remain on tenterhooks as in the absence of clarity, the market reaction is by default to sell,

The biggest risk for sterling, and also for the Euro, remains a disorderly exit but all options remain open including a new election or even a second referendum’

The Pound found brief support in the day’s strong UK jobs data, but as the jobs data indicated that employers were struggling to fill positions this ultimately did little to help Sterling recover.

Euro (EUR) Exchange Rates Strength Limited by Mixed Eurozone Economic and Political Developments

The Pound was able to edge higher versus the Euro than some other major currencies on Tuesday, as the shared currency was weighed by the latest Eurozone economic and political news.

Tuesday saw the publication of ZEW’s December economic sentiment surveys from Germany and the Eurozone.

While the economic sentiment figures saw smaller contractions in December than expected, German current conditions were forecast to come in at 55.8 but instead unexpectedly slowed to just 45.3.

The data reflected concerns that Eurozone economic activity was slowing into 2019, weighing on hopes that the European Central Bank (ECB) will take a hawkish stance on monetary policy any time soon.

On top of mixed Eurozone data, concerns that Italy and the EU were still at an impasse regarding Italy’s controversial budget plans weighed on the shared currency.

Some reports claimed Italy and the EU were closer to reaching an agreement, but others indicated that Italy was hesitant to move too far from its original plans. Overall, market demand for the Euro remained fairly weak on Tuesday.

Pound Sterling to Euro (GBP/EUR) Exchange Rate Forecast: Brexit Developments Remain in Focus Ahead of ECB Decision

With concerns about the stability of the UK government rising as UK Prime Minister Theresa May rushes to boost the popularity of her negotiated UK-EU Brexit deal, the Pound to Euro exchange rate is likely in for further volatility.

Wednesday will see the publication of the Eurozone’s October industrial production results, which could make it easier for the Euro to hold gains versus Sterling if they impress.

Overall though, developments in Brexit and UK politics will take focus throughout the day. Any signs that PM May’s deal is becoming more popular domestically could leave the Pound stronger.

On the other hand though, any fresh signs that UK Prime Minister Theresa May could face a leadership challenge or no-confidence vote would leave the Pound even weaker.

The Euro’s strength may be limited too as Thursday approaches, as Thursday will see the European Central Bank (ECB) hold its December policy decision.
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