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Pound Euro (GBP/EUR) Exchange Rate Maintains Upward Bias on Hopes of Imminent UK-EU Trade Deal

December 17, 2020 - Written by Frank Davies

Optimism over Potential Brexit Deal Continues to Fuel GBP/EUR Exchange Rate Gains

In spite of UK politicians talking down the prospect of a UK-EU trade deal the Pound to Euro (GBP/EUR) exchange rate remained biased to the upside.

Although Boris Johnson continued to indicate that trade on World Trade Organisation (WTO) terms remains the most likely outcome, effectively a no-deal state, this failed to put any pressure on the Pound.

Markets remain optimistic that the two sides can still reach an agreement at the eleventh hour in spite of the major issues that still linger.

While fishing rights still have the potential to roadblock talks, thanks to the UK’s refusal to compromise, this has not yet translated into any particular degree of investor caution.

The Bank of England’s (BoE) decision to leave monetary policy unchanged at its December meeting also helped to shore up the GBP/EUR exchange rate, meanwhile.

Pound Vulnerable to UK Retail Sales Decline

GBP exchange rates may find additional support ahead of the weekend if December’s GfK consumer confidence index improves as forecast.

If the headline index picks up from -33 to -31 this would suggest that domestic sentiment is moving in the right direction once again, in spite of ongoing Covid-19 restrictions.

However, the appeal of the Pound could take a blow if the latest UK retail sales data fails to impress.

Forecasts point towards a major decline in sales growth on the month in November, suggesting a -4.2% drop even as the country exited its second national lockdown.

As stronger levels of consumer spending and activity had previously helped to shore up the UK economy during times of slowdown a weak reading here could weigh heavily on the GBP/EUR exchange rate.

With the economy likely heading for a fourth quarter contraction any evidence of weakness could give investors incentive to sell out of the Pound once again, especially in the absence of any Brexit breakthrough.

Negative German Business Sentiment May Weigh on Euro Demand

On the other hand, demand for the Euro could prove limited on Friday with the release of December’s German IFO business sentiment surveys.

Investors expect to see an easing in both the business climate and current conditions indexes, highlighting the pressure that the Eurozone’s powerhouse economy has found itself under.

As long as the German economy appears set to experience another weak quarter of growth in the final months of the year the appeal of the Euro looks set to deteriorate.

Even so, an uptick in the business expectations index may offer EUR exchange rates a potential rallying point.

Signs that businesses have a sense of optimism heading into 2020 could see the Euro recovering some of its recent lost ground, limiting the GBP/EUR exchange rate’s ability to trend higher.
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