- Weaker Eurozone PMIs failed to weigh on Euro – Signs of slowing were of limited impact ahead of the EU referendum
- Pound softened after surprise vote in favour of Brexit – GBP exchange rates slumped in wake of shock announcement
- BoE pledged additional liquidity to support domestic economy – EUR/GBP exchange rate gains tempered
- Euro forecast to hold stronger footing over coming days – Brexit uncertainty to remain dominant with speculation over outlook of UK economy
Investors were shocked on Friday morning to find that the UK had voted to leave the EU, a decision that prompted the EUR/GBP exchange rate to surge strongly.
Surprise Brexit Victory Triggered EUR/GBP Exchange Rate Surge
After the polls opened on Thursday the Euro to Pound Sterling (EUR/GBP) exchange rate began to regain ground, with market jitters increasing in spite of opinion polls generally pointing towards a ‘Remain’ camp lead. This helped to overshadow the negative impact of the latest raft of Eurozone Manufacturing, Services and Composite PMIs, which pointed towards fresh signs of slowdown in June. France in particular signalled weakness, with all three measures falling back into contraction territory and generally dragging on the economy of the wider currency union. Nevertheless, this was not enough to put the Euro (EUR) on a weaker footing amidst a general increase in safe-haven demand.
Pressure on the Pound (GBP) started to mount over the course of Thursday despite earlier investor confidence. This intensified significantly once the first results began to come through and support for the ‘Leave’ campaign was found to be stronger-than-anticipated across the board. Market volatility increased sharply as a result, driving Sterling down against rivals as the ultimate Brexit victory became clear. As James Knightley, Senior Economist at ING, noted:
‘Financial markets have swung violently through the night with Sterling initially rallying on announcements from some polling agencies suggesting a narrow IN outcome soon after voting closed at 10pm. However, as the regional results came in it became increasingly clear that they got it wrong and risk assets and Sterling have consequently collapsed.’
Given that the EUR/GBP exchange rate had largely priced in the impact of a vote to remain earlier in the week this prompted a strong uptrend, pushing the pairing to a high of 0.8315.
BoE Stability Assurance Slowed Pound (GBP) Decline
The initial panic that followed the announcement that the UK had voted in favour of a Brexit began to subside somewhat later on Friday morning, however, as markets started coming to terms with the changed political landscape. Some measure of confidence in the Pound was shored up by comments from Bank of England (BoE) Governor Mark Carney, who attempted to calm the evident nerves of investors. Carney reiterated that the BoE stands ready to support the domestic economy, stating that:
‘A few months ago, the Bank judged that the risks around the referendum were the most significant, near-term domestic risks to financial stability. To mitigate them, the Bank of England has put in place extensive contingency plans. These begin with ensuring that the core of our financial system is well-capitalised, liquid and strong.’
However, as Prime Minister David Cameron promptly stepped down this morning an atmosphere of fear and uncertainty continued to dominate market sentiment. With nobody yet certain what the UK’s future outside of the EU will look like speculation has been rampant, keeping the Pound on a firm downtrend across the board.
Although this historic decision is also likely to impact negatively on the EU, and thus the Eurozone by extension, the Euro continued to benefit from general risk aversion. A stronger-than-expected German IFO Business Sentiment survey might have modestly increased the appetite for the single currency, even though the impact of ecostats was generally side-lined by markets’ singular focus on the EU referendum result.
EUR/GBP Exchange Rate Forecast: Brexit Risk Predicted to Keep Pound Soft
Volatility is likely to remain the predominant theme for the EUR/GBP exchange rate over coming weeks, with the impact of the Brexit vote expected to overshadow all else for the foreseeable future. Once the dust begins to settle over the weekend some greater sense of stability could return to the Pound, providing that confidence in the outlook of the UK economy can be at least partly restored. If Moody’s follows through on its suggestion of a downgrade for the UK’s rating then the mood is likely to remain grim, particularly if steam builds behind calls for independence referendums in Scotland and Northern Ireland.
While the US Dollar (USD) had been the greater benefactor of this surprise ‘Leave’ camp win the Euro is likely to remain on a stronger footing in spite of the risk of spill-over. Nevertheless, if the European Central Bank (ECB) is forced to take further easing measures to minimise the negative impact of a Brexit on the Eurozone economy then the single currency could be knocked back.
Current EUR, GBP Exchange Rates
At the time of writing, the Euro to Pound Sterling (EUR/GBP) exchange rate was trending higher in the region of 0.8076, while the Pound Sterling to Euro (GBP/EUR) pairing was slumped around 1.2384.