In spite of a lack of tangible progress in the most recent round of Brexit negotiations the Pound Euro exchange rate gained further ground at the start of the week.
A solid showing from October’s Rightmove house price data added to the more bullish mood of Sterling, suggesting that the UK housing market is still holding up well enough.
However, the Pound is likely to see increased volatility in the near term as anticipation mounts for September’s UK consumer price index report.
Forecasts point towards a fresh uptick in inflationary pressure, with the CPI expected to accelerate to 3% on the year.
This should increase the incentive for the Bank of England (BoE) to go ahead and raise interest rates in November, following through on the hawkish rhetoric of recent policymaker commentary.
Even if inflation surprises to the downside, though, this is unlikely to particularly diminish market bets on the prospect of an imminent interest rate hike.
As James Smith, Developed Markets Economist at ING, noted:
‘Given recent comments, there’s little doubt UK rate hikes are on the way. The Bank of England is keen to get out of “emergency mode” as the initial Brexit shock fades. But the Bank is also pinning its hopes on a sizable pick-up in wage growth and even perhaps more contentiously, a smooth Brexit. On the former, data over the next week is likely to show the economic backdrop is still relatively benign.
‘So while a November hike looks pretty much a done deal, we think the amount of subsequent tightening will be pretty limited and very gradual.’
Barring a severe dip in inflation the GBP EUR exchange rate is likely to remain on a stronger footing in the coming days.
Catalan Uncertainty Continues to Limit Euro Demand
Confidence in the Euro, meanwhile, remained under pressure thanks to the ongoing uncertainty of the Catalan crisis.
The Spanish government proved unsatisfied with Catalan president Carles Puigdemont’s letter on Monday, which failed to offer a straightforward answer as to whether the region had declared independence or not.
This suggests that the situation is still no closer to a resolution, casting a continued shadow over the political outlook of the Eurozone.
Signs of a shift towards the right in the Austrian election also weighed on the appeal of the single currency, with the future unity of the currency union still seemingly in question.
Fresh commentary from European Central Bank (ECB) President Mario Draghi will also be in focus this week, which could offer a further boost to the GBP EUR exchange rate.
As long as Draghi continues to talk down the prospect of any significant shift towards hawkishness amongst ECB policymakers then the upside potential of the Euro is likely to remain distinctly limited.
Current GBP EUR Interbank Exchange Rates
At the time of writing, the Pound Euro exchange rate was on an uptrend in the region of 1.1277. Meanwhile, the Euro Pound exchange rate was slumped around 0.8866.
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