Pound to Euro Exchange Rate Sustains Gains Thanks to Hopes of Brexit Financial Services Deal
After weeks of mixed performance, the Pound Sterling to Euro (GBP/EUR) exchange rate has surged in recent sessions as hopes rise that the UK and EU will be able to reach a deal to protect Britain’s financial services sectors.
After opening this week at the level of 1.1244, GBP/EUR briefly slipped lower and touched on a monthly low of 1.1191 before rebounding and putting in a recovery of over a cent.
At the time of writing, GBP/EUR trends near a fortnight high of 1.1409. Despite a brief boost in Euro (EUR) demand amid rising market risk-sentiment, the shared currency’s strength was limited by concerning Eurozone datasets.
Meanwhile, the Pound (GBP) has seen one of its best weeks of 2018 thanks to speculation of a post-Brexit financial services deal, as well as a generally hawkish tone from the Bank of England (BoE).
Pound (GBP) Exchange Rate Support Strengthened by Bank of England (BoE) Hawkishness
While the primary cause of this week’s Pound (GBP) strength was a report claiming the UK and EU were nearing the completion of a post-Brexit financial services deal, Sterling did see further strength thanks to the Bank of England’s (BoE) latest policy decision.
The Bank of England left UK interest rates frozen in November, as was widely expected. However, notably the bank took a more hawkish tone than expected about Britain’s economic outlook.
The bank predicted that wage growth would soon pick up and also forecast that in the event of a smooth and orderly Brexit, the UK economy could quickly improve and lead to a faster pace of interest rate hikes.
According to Derek Halpenny and Fritz Louw from MUFG:
‘Given [signs of wage growth] and resilient household confidence and momentum, the BoE maintained that gradual rate hikes were appropriate but that they could quicken the pace of hikes in the event of an orderly Brexit.’
As most investors only expected gradual interest rate hikes even in the event of a soft Brexit, this did bolster the Pound outlook slightly. However, Sterling strength is still ultimately capped by Brexit uncertainties.
Euro (EUR) Exchange Rate Appeal Limited as Eurozone Growth Outlook Weakens
Investors may have lost the drive to mount a strong Euro (EUR) recovery rally, as data from the Eurozone continues to disappoint this week.
The Euro had briefly seen a boost in demand on Thursday as global stock markets recovered and investors were more eager to take risks again. As investors sold the safe haven US Dollar (USD), its rival the Euro benefitted from its weakness.
However, it was unable to hold its ground against a surging Pound, and poor Eurozone data on Friday just left the shared currency unappealing again.
The Eurozone’s final October manufacturing PMI from Markit fell short of expectations. German manufacturing slowed to just 52.2 while the Eurozone’s overall figure came in at only 52.
According to Viraj Patel from ING, downside Euro risks are worsening which has dampened the currency’s chance at a recovery:
‘The near-term risks to Eurozone growth have shifted to the downside – with both slower cyclical forces and political uncertainty both at play,’
Pound to Euro (GBP/EUR) Exchange Rate Investors Anticipate Further Eurozone Data
Amid a lack of a solid Brexit deal yet, the Pound’s potential for further gains is limited even if upcoming UK data is decent.
However, the Euro’s performance could be heavily influenced by upcoming Eurozone ecostats, especially if it influences the market’s impression of the Eurozone’s economic health.
Next Tuesday will see the publication of the Eurozone’s services and composite PMI. Following the disappointing manufacturing data, worse services data would drag the Euro lower. German factory data due on Tuesday is also expected to weaken.
Eurozone retail sales data from September will be published on Wednesday which may also prove influential.
Germany’s September industrial production stats will come in on Wednesday, followed by trade balance data on Thursday. Any signs that German trade has been influenced by US-China trade uncertainties could hit the Euro.
Some notable UK ecostats include services PMI data on Monday and growth stats on Friday. The Pound to Euro (GBP/EUR) exchange rate is more likely to be driven by potential Brexit developments or Eurozone stats however.
