Pound to Euro Exchange Rate Falls as Euro Strengthens on US Dollar (USD) Weakness
Despite a brief recovery attempt on Wednesday, the Pound Sterling to Euro (GBP/EUR) exchange rate shed its advance attempts following fresh Brexit warnings from the Bank of England (BoE), and continued to tumble this morning.
Since opening this week at the level of 1.1308, GBP/EUR has been trending with a downside bias for most of the week.
GBP/EUR briefly jumped to a fortnight high of 1.1345 on Wednesday before sliding again, and the pair trended near a weekly low of 1.1230 at the time of writing.
Investors sold the Pound (GBP) on Wednesday afternoon, as the Bank of England (BoE) indicated warned on the potential effects of a ‘no-deal Brexit’. Sterling fell further this morning as BoE Governor Mark Carney issued even further Brexit warnings.
While the Euro’s (EUR) strength has been weighed by mixed Eurozone ecostats, the shared currency saw stronger performance on Thursday as it benefitted from weakness in its rival, the US Dollar (USD).
Pound (GBP) Exchange Rate Outlook Clouded Further on Bank of England’s (BoE) Brexit Warnings
UK markets are filled with significant uncertainties, as 2018 draws to an end and the formal Brexit date approaches. Those uncertainties may be set to keep worsening until there is some solid clarification on what kind of Brexit is likely.
The Bank of England (BoE) published its latest stress test results on Wednesday and also issued forecasts on potential outcomes for Britain’s economy depending on how the Brexit process unfolds.
In the event of a ‘no-deal Brexit’, in particular a ‘disorderly’ ‘no-deal Brexit’, the bank said the UK economy could contract by as much as 8% and Sterling could shed almost a quarter of its value.
This deepened market uncertainties of what kind of economic outlook to expect, and further comments today have only deepened those uncertainties.
On Thursday morning, Bank of England Governor Mark Carney said that many businesses were not yet prepared for Brexit, especially the possibility of a ‘no-deal Brexit’.
This left the Pound unappealing on market fears that regardless of how Brexit unfolds, it could serve as some kind of shock to Britain’s economy.
Euro (EUR) Bolstered by Weak US Dollar (USD) and German Unemployment
For most of the week, the Euro has been pressured by underwhelming Eurozone ecostats, as well as strength in its rival the US Dollar (USD). The Euro and US Dollar often see a negative correlation.
This also meant the Euro benefitted from Wednesday evening’s speech from Federal Reserve Chairman Jerome Powell, which knocked the US Dollar (USD).
In his speech, Powell indicated that US interest rates were ‘just below’ neutral and were likely to remain close to neutral.
This essentially meant that unless US data came in well above expectations, the Federal Reserve interest rate is unlikely to climb too much higher in 2019.
With markets increasingly betting that the Fed is nearing the end of its rate hike cycle, perceived monetary policy divergence will stop deepening, making investors less hesitant to buy the Euro compared to the US Dollar.
On top of US Dollar weakness, the shared currency also benefitted from Thursday morning’s German unemployment rate report. The data showed that Germany’s unemployment rate had unexpectedly hit a record low.
Pound to Euro (GBP/EUR) Exchange Rate Outlook Remains Focused on Brexit and Eurozone Data
With the time limit on Article 50 set to run out just over four months from now and broad uncertainties about the Brexit process still dominating markets, further developments are likely to remain the biggest focus for Pound investors.
Friday will see the publication of this week’s most notable UK data, GfK’s November UK consumer confidence results. The figure is expected to slide from -10 to -11, but the data is unlikely to be particularly influential compared to potential Brexit news.
In particular, the perceived domestic popularity of UK Prime Minister Theresa May’s Brexit plan will continue to drive Sterling.
The Euro, on the other hand, may be driven more by data. Germany’s October retail sales results, French inflation projections and most vitally Eurozone inflation projections will be published on Friday morning.
If Eurozone inflation surprises investors it could influence European Central Bank (ECB) interest rate hike bets.
Any surprising developments at the G20 summit in Argentina at the end of the week may also influence the Pound to Euro (GBP/EUR) exchange rate.