Better-than-expected German industrial production figures helped to boost the Euro to Pound exchange rate on Wednesday.
As production failed to contract -0.6% in January as expected, instead remaining flat on the year, this restored some confidence in the outlook of the Eurozone’s powerhouse economy.
Carsten Brzeski, Chief Economist at ING, noted:
‘This week’s data confirms that the German industry is still struggling to gain momentum, even though some improvement over the course of the year could be in the offing.’
The upside surprise helped to offset some of the disappointment of Tuesday’s German factory orders data, which fell significantly short of expectations to clock in at -0.8% rather than the 4.3% increase that had been forecast.
Even so, the appeal of the Euro has remained somewhat limited thanks to ongoing worries over the outcome of the French presidential election.
With far-right candidate Marine Le Pen continuing to poll strongly investors have been inclined to sell out of the Euro, as Le Pen has pledged to withdraw France from the currency union if victorious.
Greater support for the single currency could materialise on the back of the European Central Bank (ECB) policy meeting on Thursday, however.
Providing policymakers opt for a less bearish view on monetary policy this could encourage speculation that the central bank could be inclined to consider tightening policy in the nearer future.
If policymakers maintain a cautious tone and continue to talk down the prospect of any tapering of the quantitative easing program, though, the EUR GBP exchange rate could come under renewed pressure.
As the odds of an imminent interest rate hike from the Federal Reserve remain high the Euro may struggle to find support ahead of the weekend.
Demand for the Pound, meanwhile, was hampered by the news that the House of Lords had voted to amend the government’s Article 50 bill, potentially throwing off Theresa May’s Brexit timetable.
This move means that the bill will have to return to the House of Commons for a fresh vote and could possibly be the start of a round of parliamentary ping-pong.
While MPs are likely to overturn the amendment this nevertheless creates fresh uncertainty surrounding the issue of Brexit, limiting the appeal of Sterling.
Chancellor Philip Hammond’s budget speech did little to reverse the direction of the EUR GBP exchange rate during Wednesday’s European session, offering minimal excitement for investors.
Of greater interest were the revised forecasts of the Office for Budget Responsibility, which offered a mixed picture regarding the outlook of the domestic economy.
Friday’s UK visible trade balance and industrial production data could encourage the Pound to cede further ground if the figures provide further evidence of economic weakness.
A widening of the trade deficit would not bode well, suggesting that the economy will be more vulnerable to negative developments with its trading partners.
