Uncertainties Over Post-Brexit Trade Keep Pound Euro (GBP/EUR) Exchange Rate Under Pressure
Although the British Retail Consortium like-for-like sales figure bettered forecast this failed to shore up the Pound to Euro (GBP/EUR) exchange rate, with confidence in the domestic outlook still generally muted.
Uncertainty over Brexit continues to weigh on the appeal of the Pound (GBP), with the UK and EU seeming no closer to agreement on a number of key issues even as the clock continues to run down.
Comments from Stefaan de Rynck, main advisor to chief EU negotiator Michel Barnier, gave investors fresh cause for concern on Monday evening.
As De Rynck commented that a mutual recognition of standards would not be enough to secure the UK a deep-ranging free-trade deal with the EU after Brexit this prompted GBP exchange rates to soften.
Reports that the UK faces a sharp uptick in business insolvencies in the coming year, with trade insurer Euler Hermes forecasting an increase of 8% on the year, further dented optimism in economic outlook.
Solid Eurozone Retail PMIs Shore up Euro Exchange Rates
Confidence in the Euro (EUR), meanwhile, has strengthened as investors continue to process the implications of Sunday’s Italian election result, removing some support from the GBP EUR exchange rate.
With the ultimate influence of the Eurosceptic Five Star Movement still looking rather limited at this juncture this initial unease of investors has somewhat eased.
Even so, as researchers at Danske Bank noted:
‘Going forward, the negotiations remain messy and the next important date will be 23 March when both houses of Parliament are due to come together for the first time. In our view, it remains unlikely that we will have an Italian government in place before May or June and at this stage we cannot rule out new elections in H2 this year.’
A solid raft of Eurozone retail PMIs offered the single currency additional support on Tuesday morning, pointing towards solid levels of consumer spending across the currency union.
While this is unlikely to particularly influence the policy outlook of the European Central Bank (ECB) this positive showing still bodes for the domestic economy.
GBP/EUR Exchange Rate Gains Forecast Ahead of ECB Policy Meeting
The GBP/EUR exchange rate is likely to regain some ground ahead of Thursday’s ECB policy meeting, given the persistent dovishness of various policymakers.
Unless the central bank shows signs of shifting towards a more optimistic stance on monetary policy the appeal of the Euro looks set to deteriorate once again.
While the odds of any imminent return to a tightening bias remain low any dovishness could see EUR exchange rates stuck on a softer footing.
Demand for the Pound, meanwhile, could deteriorate further if Friday’s raft of UK production and trade data disappoints.
Given the high level of uncertainty that still surrounds the outcome of Brexit negotiations any signs of weakening trade conditions could weigh heavily on GBP exchange rates.
Focus will also fall on the latest NIESR gross domestic product estimate, which is forecast to point towards a slight loss of momentum in the three months to February.
Any indications of weaker economic growth could see the GBP/EUR exchange rate extending its bearish run heading into the weekend.