The Pound Euro exchange rate could become increasingly volatile tomorrow depending on the outcome of the UK’s GDP figures and various German IFO surveys.
GBP Exchange Rates Dependent on UK GDP Release
The near-term outlook for the Pound is highly dependent on tomorrow’s UK GDP release, with markets and indeed the Bank of England (BoE) waiting for more UK data before drawing conclusions regarding the need for a November rate hike.
BoE Deputy Governor Jon Cunliffe recently cautioned against the BoE moving for a rate hike in November, asserting that whilst the UK economy is suffering weak growth, the prospect of a rate hike is an ‘open question’.
‘I am not going to try and anticipate the meeting, but for me the economy has clearly slowed this year’. Cunliffe stated.
His comments refer also to the fact that Britain’s economy grew at a quarter-on-quarter rate of only 0.3% in the first half of this year – the weakest growth demonstrated since 2012.
UK GDP is currently estimated to remain steady at 0.3% quarter-on-quarter, with a year-on-year print of 1.5%.
If this estimation proves accurate then the bank may continue to shift back towards the dovish end of the spectrum – an event that would put the Pound Euro exchange rate under increasing pressure.
EUR Exchange Rates Volatile Ahead of Thursday’s ECB Rate Decision
Whilst the European Central Bank (ECB) is not widely expected to vote for a rate hike on Thursday, investors do expect the bank to announce its timetable for reducing the size of its monthly asset purchases and to move for rate hikes in 2018.
This move comes in the wake of continued positive growth within the Eurozone, with the latest IHS Markit PMI releases also signalling ongoing strength in output within the private sector in October.
An Analyst from Wells Fargo shared this positive sentiment, stating:
‘The Eurozone economy continues to gather momentum and most analysts, ourselves included, look for the Governing Council to announce another reduction in the bond purchase rate at the policy meeting on Thursday that likely will take effect early next year. In our view, the ECB will cease buying bonds altogether next year, although the exact timing in somewhat uncertain. We also look for the Governing Council to begin a slow process of rate hikes in late 2018’.
If the bank does announce its QE tapering plans then demand for the Euro will remain robust, but any cautious remarks in the accompanying statement could place Euro (EUR) exchange rates under pressure.
If the bank decides to delay reducing its quantitative easing process beyond the initial timeline, the Euro will likely fall, allowing the Pound to capitalise.
Brexit Progress and the Outlook for the GBP EUR Exchange Rate
Brexit continues to play a significant role in determining the outlook for the Pound, with last week’s revelations that ‘progress’ had been made initially driving Sterling higher.
The extent of the progress made, however, remains to be seen, as despite European Council President Donald Tusk’s recent announcement that the green light had been given for internal preparations for trade talks to take place, neither side has officially budged in regards to the original impasse; the UK refusing to reveal how much it is prepared to pay in its Brexit divorce bill, and the EU refusing to begin trade discussions until a figure is decided upon.
In this sense, London is keeping its primary bargaining chip; the Brexit ‘divorce bill’ sum, close to its chest – as agreeing to a figure before trade talks have even begun could undermine the UK’s hand.
UK Chancellor Philip Hammond announced today that he hopes both parties will reach an agreement on the ‘principals’ of a transitionary period soon, though he also refused to commit to the prospect that a deal will be reached before the end of the year.
If negotiations do not demonstrate clear progression before the end of the year then demand for the Pound will likely decrease as investors grow ever more anxious about the prospect of a ‘no-deal’ Brexit.
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