Despite some positive Eurozone data the Euro Pound exchange rate started the week on a narrow trend, hampered by increased market risk appetite.
- Euro Pound exchange rate benefitted from steady Portuguese credit rating – Threat to ECB quantitative easing program diminished
- Eurozone PMIs bettered expectations in October – Euro failed to benefit amidst increased risk appetite
- Pound predicted to remain under pressure from Brexit speculation – Market anxiety over hard exit to persist
- Continued German confidence to boost EUR GBP exchange rates? – German IFO Business Sentiment Survey forecast to show modest uptick
With the outlook of the UK economy still decidedly uncertain, however, the EUR GBP exchange rate is expected to return to a stronger footing.
Portugal Credit Rating Reprieve Failed to Substantially Boost Euro Pound Exchange Rate
Investors breathed a sigh of relief after Portugal avoided another ratings downgrade on Friday evening, with DBRS opting to maintain its BBB rating with a ‘stable’ outlook. This will allow the European Central Bank (ECB) to continue buying Portuguese bonds as part of its quantitative easing program, staving off concerns of a fresh Eurozone crisis for the time being. As a result Euro exchange rates were given a boost, although a heightened atmosphere of risk appetite diminished demand for EUR on Monday morning.
This saw the Euro Pound (EUR GBP) exchange rate trending lower, despite the latest raft of Eurozone PMIs proving similarly encouraging. Both the French and German manufacturing sectors surprised to the upside in October, showing strong expansion on the month. With the German Composite PMI strengthening from 52.8 to 55.1 this suggested that the Eurozone economy remains in a resilient state, reducing market concerns over the negative impact of recent political and economic uncertainty.
Brexit Speculation Forecast to Maintain Downside Pound Sterling (GBP) Bias
With fresh UK data lacking at the start of the week the Pound (GBP) has remained largely at the mercy of investor sentiment. Speculation over the future of the UK economy and the level of divorce from the EU continues to weigh heavily on Sterling, with the heads of the devolved governments due to meet with Prime Minister Theresa May for their first collective discussion over the issue. Markets remain predominantly concerned by the prospect of a hard Brexit, leaving the Pound vulnerable to further downside pressure.
Further volatility for the EUR GBP exchange rate is likely in response to the High Court decision over a constitutional challenge to the government’s ability to trigger Article 50 without a vote in Parliament. A ruling in favour of the government position would likely reinforce the odds of a more severe Brexit scenario, but a ruling in favour of the complainant could also prompt Pound anxiety as Oliver Harvey, macro strategist at Deutsche Bank, notes:
‘It is likely to meaningfully increase political uncertainty in the UK and potentially trigger a constitutional crisis and, as we have noted, new general election. With the political prospect of overturning June’s decision currently slim, it is also likely to be unwelcome for the EU as it creates uncertainty about the ability to conclude the Brexit process before European Parliament elections in May 2019.’
EUR GBP Exchange Rate Predicted to Benefit from Stronger German Business Sentiment
Demand for the Euro could be boosted further if Tuesday’s German IFO Business Sentiment Survey points towards an uptick in domestic confidence. Providing that the Eurozone’s powerhouse economy continues to demonstrate positive signs of strength investors are likely to pile back into the common currency. On the other hand, if sentiment fails to show any particular improvement the EUR GBP exchange rate is expected to struggle to capitalise on any fresh Pound weakness.
Euro softness could persist over coming days if the odds of an imminent Federal Reserve interest rate hike are seen to increase, with the strength of the US Dollar (USD) weighing heavily on the EUR. As the ECB is increasingly expected to enact some measure of monetary loosening in December the prospect of further policy divergence between the two central banks is unlikely to encourage investors.
Current Interbank Exchange Rates
At the time of writing, the Euro Pound (EUR GBP) exchange rate was trending narrowly around 0.89, while the Pound Euro (GBP EUR) pairing was trending in a tight range at 1.12.
