Anticipation for Brexit Vote Leaves Euro Pound Sterling (EUR/GBP) Lacking in Momentum
As anticipation mounted for parliament’s upcoming vote on the proposed Brexit deal the Euro to Pound Sterling (EUR/GBP) exchange rate found itself stuck in a holding pattern.
Given Boris Johnson’s lack of a parliamentary majority there were doubts over his ability to secure enough support among MPs to push the agreement over the finish line.
With the Democratic Unionist Party (DUP) already expressing opposition to the new proposal investors saw a solid risk of the deal falling through, raising the odds of a no-deal scenario.
As James Smith, developed markets economist at ING, noted:
‘Many Labour MPs will still be wary – and if nothing else, voting for the deal could theoretically help hand Johnson a better election victory.’
This left Pound Sterling (GBP) on a generally weaker footing today, in spite of comments from EU officials suggesting that an extension could be on the cards if MPs voted against the deal.
Narrowed Eurozone Current Account Surplus Limits Euro (EUR) Demand
Although August’s Eurozone current account surplus saw a smaller narrowing than forecast this failed to offer the Euro (EUR) any significant boost against its rivals.
Worries over the economic outlook of the Eurozone remained as 25% US tariffs came into force on a number of EU exports, stoking fears of a further slowdown in trade.
While the Italian economy showed some signs of resilience, with construction output picking up sharply in August, this was not enough to shore up the single currency.
However, a boost could be in store for EUR exchange rates on Monday if German producer price index data offers investors cause for confidence.
As forecasts point towards producer prices improving from -0.5% to -0.1% on the month this could encourage hopes that inflationary pressure in the Eurozone’s powerhouse economy is strengthening.
Even so, unless producer prices show significant improvement this is unlikely to be enough to push the European Central Bank (ECB) into taking a less dovish outlook.
GBP Exchange Rates Vulnerable to Evidence of Weaker Business Confidence
The outcome of Saturday’s parliamentary vote looks set to drive the EUR/GBP exchange rate heading into next week.
If MPs vote down the proposed deal this could drag the Pound sharply lower across the board as a renewed sense of uncertainty grips markets.
On the other hand, approval for the deal may help GBP exchange rates to return to their recent multi-month highs.
However, further weakness could be in store for the Pound on Tuesday as the CBI releases its latest industrial trends orders and business optimism indexes.
Fresh indications of weakness within the UK economy may provoke anxiety over the outlook for the fourth quarter, increasing the risk of a sustained slowdown in growth.
Evidence that businesses remain in a negative state of mind would give investors incentive to sell out of the Pound, highlighting the detrimental impact that Brexit-based uncertainty has already had on the economy.
