January 31, 2019 - Written by Toni Johnson
STORY LINK GBP to EUR Exchange Rate Remains Near Weekly Worst Despite Disappointing German Data
Despite broad concerns about the Eurozone’s slowing economy and a lack of domestic support for the Euro, the British Pound to Euro (GBP/EUR) exchange rate continued to slide today amid No-deal Brexit fears and the latest Federal Reserve news. The pair is unlikely to recover later in the week as Brexit uncertainty persists.
After last week’s sharp gains, GBP/EUR has shed around a half of those gains this week. GBP/EUR opened the week at the level of 1.1579, close to Friday’s one year high of 1.1601, but has tumbled throughout this week so far. GBP/EUR touched on a weekly low of 1.1409 this morning and currently trends close to the level of 1.1422.
While the Euro lacks much in the way of domestic support, the latest Brexit and Federal Reserve news has made it appealing versus its rivals, the Pound and US Dollar (USD).
Investors are anticipating further Brexit developments, as well as the key Eurozone ecostats due for publication towards the end of the week.
GBP Exchange Rates Unappealing as No-deal Brexit Fears Return
Since mid-January, the Pound saw a surge in demand that continued for around two weeks as markets became increasingly confident that UK Parliament would work to prevent a worst-case scenario No-deal Brexit from becoming reality.
However, this week the Pound began to tumble following another Parliament debate that indicated the UK was still no closer to finding a way to resolve the Brexit process, despite the formal Brexit date now being under two months away.
On Tuesday, Parliament held a long debate that ultimately led to MPs voting for the government to attempt to reach an alternative deal on the contentious issue of the Irish backstop.
Hopes that this could bolster the appeal of Prime Minister Theresa May’s Brexit deal were limited though, as the EU quickly said it would not change its mind on the backstop.
Plus, while Parliament voted in favour of an advisory amendment to prevent a No-deal Brexit, it also voted against an amendment that would give Parliament the opportunity to vote for a delay to the formal Brexit date.
Analysts still believe a formal Brexit delay is likely and this is keeping Sterling from falling too far. However, with no resolution in sight and a delay still looking uncertain, No-deal Brexit fears have worsened again and the Pound has fallen this week.
EUR Exchange Rates Benefit from Weakness in Rivals despite Weak Eurozone Data
Investors have bought the Euro versus the tumbling Pound this week, but this has been more due to weakness in the Euro’s rivals than any supportive news from the Eurozone.
As well as the Pound’s weakness on Brexit jitters, investors have been buying the Euro as the US Dollar (USD) weakens. The Euro and US Dollar have a negative correlation, so the shared currency often benefits from US Dollar weakness and vice versa.
This week has seen the US Dollar sold on the back of US political uncertainties, as well as rising caution from the Federal Reserve.
The Federal Reserve
took a more cautious stance on US monetary policy during its January policy decision yesterday. It marked a change of tone after the bank’s hawkishness in December confused investors.
Markets have now essentially priced out a US interest rate hike from the Fed this year, and this is leading to USD weakness, bolstering EUR demand today. Concerns that the US could see another government shutdown in February are also keeping the pressure on USD.
This week’s Eurozone data has been mixed. Some stronger than expected figures from France earlier in the week gave the Euro some support, but the shared currency’s appeal was limited today by some surprisingly weak German retail sales and unemployment stats.
GBP/EUR Exchange Rate Forecast: Manufacturing PMIs and Eurozone Inflation Ahead
Investors are unlikely to buy the Pound back from this week’s losses, at least not without some kind of notable development in the Brexit process.
With the EU unlikely to change its stance on the Irish backstop and UK Parliament still unable to unite behind a single Brexit option, concerns are worsening that the Brexit process could end with a No-deal outcome.
This is likely to keep pressure on Sterling, but GBP/EUR could recover slightly if upcoming Eurozone data comes in well below expectations.
Friday will see the publication of the Eurozone’s final January manufacturing PMIs from Markit, as well as January’s Consumer Price Index (CPI) inflation projections.
Inflation may be particularly influential. If the Eurozone’s inflation rate falls short of forecasts, hopes for 2019 monetary policy tightening from the European Central Bank (ECB)
could fade and the Euro could see further weakness.
On the other hand, stronger inflation data may boost the case for a 2019 rate hike and knock the Pound to Euro exchange rate lower.
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TAGS: Pound Euro Forecasts