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Increased Tensions between Italy’s League and 5-Star Movement Leaves Pound Sterling Euro (GBP/EUR) Exchange Rate Flat

Euro Currency Forecast

Pound Euro (GBP/EUR) Exchange Rate Muted as Political Tensions in Italy Increase

UPDATE: The Pound Sterling Euro (GBP/EUR) exchange rate remained muted and the pairing is currently trading at an inter-bank rate of €1.1128.

The Euro was left under pressure as tensions between Italy’s League and 5-Star Movement have increased as each party has accused the other of betrayal and bad faith.

Leader of League, Matteo Salvini warned he would quit the government unless 5-Star dropped its opposition to projects close to his party’s heart.

Commenting on the increased tensions, Matt Cairns, rates strategist at Rabobank said:

‘We are less convinced that the coalition may be about to collapse, that is because Salvini knows he has a strong hand and that is what he is trying to exert currently with the Prime Minister and [coalition partner] Luigi di Maio.’

Pound Euro (GBP/EUR) Exchange Rate Edged Down as UK Could Already be Entering a Recession

The Pound Sterling Euro (GBP/EUR) exchange rate slipped and the pairing is currently trading at an inter-bank rate of €1.1117.

The Pound slumped against the single currency on Monday morning as NIESR thinktank suggested the UK could already be entering a recession.

It has been suggested that there is a 25% chance that the UK could be falling into a recession thanks to Brexit uncertainty.

Added to this, the thinktank warned that the UK would suffer a ‘severe downturn’ in the event of a disorderly Brexit.

However, it noted that if the country left the EU in an orderly fashion without a deal the economy would stagnate in 2020 and return to growth in 2021.

In the assessment of the economy, the NIESR states:

‘The outlook beyond October, when the United Kingdom is due to leave the European Union, is very murky indeed with the possibility of a severe downturn in the event of a disorderly no-deal Brexit.’

Euro (EUR) Edges Higher as Markets Await ECB Meeting

The Euro rose against Sterling at the start of the week as investors hope the European Central Bank (ECB) will give its clearest signal of policy easing.

Thursday’s meeting is expected reveal the bank’s clearest signal yet, if not details of the policy.

Commenting on the upcoming meeting, Strategist at BMO Capital Markets, Stephen Gallo said:

‘FX markets don’t tend to get too excited about monetary policy when it’s all nuance and forward guidance, but when central banks are making actual rate moves and QE adjustments, monetary policy becomes the driving theme.’

Last month, ECB President Mario Draghi suggested fresh easing to combat the bloc’s low inflation with fellow policymakers backing this call.

Commenting on the upcoming meeting, Florian Hense, Berenberg economist noted:

‘In response to weak growth and still subdued inflation, the ECB will likely adjust its guidance in July and vow to keep rates at ‘present or lower’ rather than just at ‘present’ levels.’

However, heightened tensions in the Middle East likely provided support for the safe-haven Euro, offsetting market expectations of a dovish ECB.

Sterling (GBP) Slides as Chancellor Announces Plans to Resign

Sterling remained under pressure as voting for the next Conservative leader is scheduled to end at 17:00 BST.

The next Prime Minister will be announce on Tuesday and take office, replacing Theresa May on Wednesday.

However, the Pound remained under pressure as UK Chancellor Philip Hammond revealed plans to quit if front-runner Boris Johnson wins.

Hammond stated that a no-deal Brexit, the option Johnson has left open was ‘not something I could ever sign up to.’

He also added that ‘It’s very important that a Prime Minister is able to have a Chancellor that is closely aligned with him in terms of policy.’

When questioned whether he thought he would be sacked this week, the Chancellor said he would resign on Wednesday to Theresa May.

Pound Euro Outlook: Will a Dovish BoE Weigh on GBP?

Looking ahead to Tuesday, the Pound (GBP) could slump against the Euro (EUR) following the release of the Bank of England’s (BoE) FPC meeting minutes.

If the Bank’s Financial Policy Committee is overly dovish and reveal the chances of an interest rate cut in 2019 are high, Sterling could slump.

Meanwhile, the release of the Eurozone’s flash consumer confidence could cause the Euro to slide on Tuesday afternoon.

If confidence slumps further than forecast, it could cause the Pound Euro (GBP/EUR) exchange rate to rise.