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Pound Sterling to Euro Exchange Rate Outlook Dampened by Hopes for Italy-EU Budget Deal

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Pound to Euro Exchange Rate Losses Limited by Weaker Eurozone Data and Brexit Hopes

Mixed movement in the Pound Sterling to Euro (GBP/EUR) exchange rate has persisted since markets opened this week, though the pair trended slightly lower on Wednesday morning due to perceived Eurozone political developments.

GBP/EUR opened this week at the level of 1.1133 and has since fluctuated relatively closely to the week’s opening levels.

A slightly stronger Euro since Tuesday evening has pushed GBP/EUR down to trend nearer the level of 1.1100 at the time of writing.

Demand for the Euro (EUR) was a little stronger due to developments between the Italy and EU, ahead of Wednesday’s anticipated Federal Reserve decision.

However, Pound to Euro (GBP/EUR) exchange rate losses were slightly limited by Brexit speculation, as well as recent Eurozone data which has disappointed investors.

Pound (GBP) Exchange Rates Mixed as Brexit Uncertainties Dominate the Outlook

Investors have been hesitant to move too much on Sterling this week so far. While UK Prime Minister Theresa May has announced a new date for a UK Parliament vote on her Brexit plan, Brexit uncertainties have only been prolonged.

There is still broad uncertainty about how the Brexit process will unfold, as UK Prime Minister May struggles to find enough support for her negotiated Brexit plan to pass it.

This has worsened concerns that the UK could crash out of the EU without any deal at all, leading to a worst-case scenario ‘no-deal Brexit’.

In fact, Tuesday saw the UK government announce that it planned to finish implementing its preparations for the possibility of a ‘no-deal Brexit’. According to a spokesperson for the Prime Minister:

‘Cabinet agreed … we have now reached the point where we need to ramp up these preparations. This means we will now set in motion the remaining elements of our no-deal plans,

Cabinet also agreed to recommend businesses now also ensure they are similarly prepared, enacting their own no-deal plans as they judge necessary. Citizens should also prepare,’

Hopes that the threat of ‘no-deal Brexit’ could make UK Prime Minister Theresa May’s Brexit deal more attractive and help it to pass has given Sterling some minor support, however.

Britain’s November inflation rate report was published this morning, but as the data largely met expectations it did little to influence the Pound.

Euro (EUR) Exchange Rates Climb as Italy and EU Reach Deal on Italy’s Budget

Weeks of uncertainty and concerns regarding tensions between Italy’s anti-establishment government and the EU seemingly came to an end on Wednesday, as reports emerged suggested that a deal had been made on Italy’s controversial budget plans.

Italy’s budget plans had the nation running a deficit in order to support public borrowing and spending, but the EU warned this planned deficit was too deep for EU rules.

The news shook financial markets amid concerns that this would worsen Euroscepticism in Italy and worsen the perceived chances of an ‘Italexit’.

Investors were hesitant to buy the Euro too much yet however, as officials urged caution until the deal is formally confirmed. According to a source in Italy Prime Minister Giuseppe Conte’s office, via Reuters:

‘There is reasonable expectation that the budget proposal will be brought to the Commission’s attention tomorrow and that this will be positive for Italy,

But it is necessary to wait for the procedure to be completed in order to consider the negotiation definitively concluded.’

Demand for the Euro has also been supported by weakness in the US Dollar (USD), the Euro’s rival which sees a negative correlation to the shared currency.

Pound to Euro (GBP/EUR) Exchange Rate Investors Anticipate Political Developments and Fed News

The Pound to Euro (GBP/EUR) exchange rate could be in for further losses in the coming sessions if there are positive Eurozone political developments, or if the Federal Reserve’s December policy decision bolsters Euro demand.

On Wednesday evening, the Federal Reserve is expected to hike US interest rates for the fourth time this year. However, the bank will also likely give more detail on its 2019 monetary policy outlook.

If the Federal Reserve is cautious and indicates that US interest rates will only rise if US data is strong, Fed rate hike bets could fall. This may lead to US Dollar (USD) weakness, and bolster the strength of its rival the Euro.

The Euro will also likely benefit from confirmation of a budget deal between Italy and the EU.

Upcoming Eurozone data could give the Euro additional support if it beats market expectations. October’s Eurozone current account report will be published on Thursday, followed by consumer confidence stats from Germany and the Eurozone overall on Friday.

Of course, any surprising Brexit developments in the coming sessions may influence Sterling and the Pound to Euro (GBP/EUR) exchange rate.