Possible Brexit Breakthrough Fuels Euro Pound Sterling (EUR/GBP) Exchange Rate Losses
Hopes of a potential breakthrough in Brexit negotiations left the Euro to Pound Sterling (EUR/GBP) exchange rate trending sharply lower on Tuesday.
As a pair of EU officials signalled optimism that a draft Brexit deal could be agreed before the end of the day demand for Pound Sterling (GBP) picked up.
This followed on the heels of chief EU negotiator Michel Barnier’s ultimatum to Boris Johnson to agree to a customs border in the Irish Sea by midnight.
While the Irish border issue remains a particular thorn in the side of negotiators a sense of positivity among investors helped to lift the Pound to fresh highs over the course of the afternoon.
However, if a breakthrough fails to materialise overnight this could see the EUR/GBP exchange rate rally sharply.
Negative Eurozone Economic Sentiment Limits Euro (EUR) Appeal
Although October’s set of ZEW economic sentiment indexes bettered forecasts this failed to offer the Euro (EUR) any rallying point.
While the Eurozone sentiment index avoided a sharp decline to -33 investors still took little encouragement from the negative state of the data.
As sentiment remained deep within negative territory this suggests that the Eurozone economy is still on track to lose further momentum in the fourth quarter.
Worries over the health of the economy could intensify if August’s Eurozone trade balance shows a narrowed surplus.
Fresh evidence that deteriorating global trade conditions are dragging on the growth of the currency union may put a fresh dampener on EUR exchange rates on Wednesday.
On the other hand, an uptick in the Eurozone’s monthly consumer price index may offer the single currency a leg up.
With the European Central Bank (ECB) still looking biased towards further dovishness any signs of stronger inflationary pressure could give the EUR/GBP exchange rate a lift.
Stronger UK Inflation Set to Lift Pound (GBP) Exchange Rates
Even in the midst of ongoing Brexit developments, the Pound could find support on the back of September’s UK consumer price index figures.
With investors anticipating a modest uptick in the headline inflation rate this may give the Bank of England (BoE) greater incentive to leave interest rates on hold in the coming months.
If inflation pushes closer to the BoE’s 2% target, climbing from 1.7% to 1.8% as forecast, the case for an interest rate cut could diminish.
Even so, as recent average earnings figures showed signs of a slowdown a higher inflation rate could stoke fears that UK wage growth is stalling.
However, political developments may still eclipse anything other than a dramatic change in inflation as markets continue to assess the odds of an imminent Brexit deal.