Pound Sterling Euro (GBP/EUR) Exchange Rate Struggles to Recover From Brexit Anxiety
A persistent sense of uncertainty over the future of Brexit and Theresa May kept Pound Sterling (GBP) under pressure on Tuesday morning, even as the initial bout of market jitters eased.
While markets recovered from the shock of May’s decision to pull the parliamentary vote on the EU Withdrawal Agreement this was not enough to give the Pound any significant boost.
There is little sense of clarity over what will follow now that May has returned to the continent to meet with EU leaders, with the threat of a no-deal Brexit or potential leadership challenge looming large.
Although October’s UK average weekly earnings data surprised to the upside, accelerating 3.3% on the year in the three months to October, this failed to shore up the Pound Sterling to Euro (GBP/EUR) exchange rate.
Even with UK wage growth picking up the Bank of England (BoE) is likely to remain on hold for some months to come, thanks to domestic political uncertainty.
Improved German Economic Sentiment Limits Euro (EUR) Exchange Rate Downside
Confidence in the Euro (EUR), meanwhile, improved thanks to an unexpected improvement in the German ZEW economic sentiment index for December.
As the index jumped from -24.1 to -17.5 this encouraged a greater sense of confidence in the outlook of the Eurozone’s powerhouse economy.
Even so, as the index remains firmly within negative territory the impact on EUR exchange rates ultimately proved limited.
Demand for the single currency could deteriorate further ahead of Thursday’s European Central Bank (ECB) policy announcement.
While the central bank is widely expected to wind down its quantitative easing programme this is unlikely to give the Euro much in the way of support.
Unless policymakers show greater signs of hawkishness the GBP/EUR exchange rate could recover some ground in the wake of the announcement.
Brexit Uncertainty Forecast to Keep GBP/EUR Exchange Rate Under Pressure
However, UK political developments are likely to remain the primary driving force of the GBP/EUR exchange rate this week.
Until investors see signs of greater clarity regarding Brexit the appeal of the Pound is unlikely to experience any particular improvement.
As Kit Juckes of Societe Generale noted:
‘As Theresa May heads off around Europe looking for some help, the only thing that’s certain is that uncertainty will be prolonged into the New Year. A January vote on a slightly altered deal is possible but the language from her opponents isn’t encouraging. A Conservative Leadership contest or a vote of no confidence engineered by the Labour Party are also possible but likewise, it isn’t really clear what that would give us. A no-deal Brexit, a version of the current deal and a second vote are all still possible, as is a General Election.’
With domestic data thin on the ground in the days ahead investors will find little distraction from Brexit and the unfolding sense of chaos in UK politics.
All in all, the Pound Sterling to Euro (GBP/EUR) exchange rate looks unlikely to recover from its latest decline before the end of the year.
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