The Pound Euro exchange rate has been fluctuating since markets opened this week, as Brexit news and Spain-Catalonia tensions have weakened both currencies. As British inflation rose in September as expected, Bank of England (BoE) speculation has also returned to markets.
GBP EUR began the week trending at the level of 1.1238 and since then has fluctuated between highs of 1.1285 and lows of 1.1212.
Pound (GBP) Tests Highs as UK Inflation Boosts BoE Speculation
The Pound outlook has improved over the past month or so, but high uncertainty about the Brexit process is still limiting its potential gains.
The Bank of England (BoE) has been signalling that a UK interest rate hike could be possible in the coming months and investor speculation of such a move has helped the currency to strengthen.
Britain’s September inflation results, published this morning, came in at 3% year-on-year and 0.3% month-on-month as expected. The high inflation rate is likely to put pressure on the BoE.
Markets are also more optimistic about the Brexit process – at least when concerns about its lack of progress are subdued.
EU chief negotiator Michel Barnier has indicated that the UK could indeed be given a post-Brexit transitional period to help avoid a ‘cliff-edge’ scenario for Britain’s economy and its citizens.
The EU has also hinted that it is preparing for talks on post-Brexit trade deals with Britain.
However, UK-EU negotiations have been stuck in a ‘deadlock’ for weeks now and concerns are rising that a lack of any progress could ultimately lead to a ‘hard Brexit’.
Bloomberg reported on Monday that some people familiar with negotiations are concerned about the possibility of a ‘Brexit breakdown’, a collapse in negotiations that will cause the UK to walk away with no Brexit deal.
Still, there is still hope for the deadlock to be broken. A joint statement from UK Prime Minister Theresa May and EU Commission President Jean-Claude Juncker stated that they expect Brexit negotiations to accelerate in the coming months.
The Pound outlook could be notably influenced by Wednesday’s UK job market report. If Britain’s August wage growth results beat expectations for example, the BoE is likely to be less hesitant to tighten monetary policy. This would lead to stronger Pound demand.
Any developments in the Brexit process could also help Sterling advance, as the currency’s strength remains capped by uncertainty.
Euro (EUR) Limp on Spain-Catalonia Tensions
Investors have had little reason to buy the Euro in recent sessions, as Catalonia’s threats of independence from Spain have continued to hit headlines.
After Catalonia leader Carles Puigdemont’s letter to Spain’s government proved unsatisfactory and vague, Spanish Prime Minister Mariano Rajoy has hinted that he could activate Article 155.
Article 155 of Spain’s constitution would allow the Spanish government to take legal control over an autonomous region like Catalonia. The move would be unprecedented.
On Tuesday, tensions between Catalonia and Spain remained high as the Spanish government arrested two Catalonian separatists.
Concerns that tensions will only worsen if Spain takes control over Catalonia have kept pressure on the shared currency.
Domestic data has weighed on the Euro too. The Eurozone’s final September Consumer Price Index (CPI) results met expectations in all notable prints. Core inflation slipped to 1.1% year-on-year as forecast while the yearly inflation rate remained at 1.5% as projected. Monthly inflation edged higher from 0.3% to 0.4%.
However, ZEW’s October economic sentiment surveys disappointed. Both the Eurozone and German prints dropped, coming in at 26.7 and 17.6 respectively. Meanwhile Germany’s current conditions print slipped from 87.9 to 87.
Speeches from European Central Bank (ECB) officials in the coming days could have an impact on Euro movement, but amid a lack of surprising inflation news the bank’s tone is unlikely to have changed.
Instead, it’s possible the Euro will continue to see relatively flat trade from now until the ECB policy decision on the 26th of October, when the ECB is expected to announce its plans for withdrawing quantitative easing (QE).
GBP EUR Interbank Rate
At the time of writing this article, the Pound Euro exchange rate trended in the region of 1.1267. The Euro to Pound exchange rate trended at around 0.8873.
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