Volatility Forecast for GBP/EUR Exchange Rate; Pound to Euro Inching Higher as Davis Delivers Brexit Speech

Update: David Davis Soon to Deliver Brexit Speech; GBP/EUR Gains Soft as Markets Await Forecasts

Brexit Secretary David Davis is about to begin a speech aimed at reassuring EU officials that the UK will not attempt to slash regulation in order to undercut the bloc after the divorce, keeping Pound Sterling to Euro (GBP/EUR) exchange rate gains restrained this morning.

Markets are concerned that EU officials might not respond warmly to his assertion that the UK will seek close regulatory alignment with the EU following Brexit.

Should Davis’s comments be met with scepticism from his European counterparts, the Pound Sterling to Euro exchange rate could weaken significantly.

Pound Sterling Weakens Today on Empty UK Data Calendar; Will GBP/EUR Exchange Rate Return to Last Week’s Lows?

The GBP/EUR exchange rate fell -0.8% during the first half of last week, even though comments from UK policymakers were upbeat and the latest economic data strong.

Monday saw Pound Sterling failing to capitalise on confidence from Bank of England (BoE) official Gertjan Vlieghe, who said that UK monetary policy was on an upwards trajectory, rather than November’s rate hike being a one-off.

Losses against the Euro were somewhat contained by the fact that Martin Schultz announced he was stepping down as leader of Germany’s Social Democratic party (SPD) in an attempt to increase the odds that his party would vote in favour of forming another grand coalition with Angela Merkel and her Christian Democratic Union (CDU party).

This reminded markets that Germany’s political situation is still fragile, with a way to go yet before the nation has a fully functioning government again.

The Pound continued the trend of failing to benefit from positive news on Tuesday, with the GBP/EUR exchange rate continuing to fall despite a higher-than-expected pace of UK consumer price growth during January.

While some of Wednesday’s Eurozone GDP figures marginally disappointed forecasts, the overall message from the data was that the Eurozone economy continues to perform robustly. This had the effect of boosting the Euro.

Meanwhile, Foreign Secretary Boris Johnson delivered a speech on Brexit that was billed as an attempt to unify Brexiters and Remainers, although he continued to push a ‘hard Brexit’ message.

Friday’s Disappointing January UK Retail Sales Create Bump in the Road for GBP/EUR Exchange Rate Recovery

The Pound found support towards the end of the week and rebounded from the lows it had struck versus the Euro, with weakness in the US Dollar and volatility on the global markets proving beneficial for the GBP/EUR exchange rate.

Markets were looking for a safe and stable asset as economic concerns weighed on the US Dollar. This pushed the Pound up significantly versus the Euro, despite solid Eurozone trade balance figures.

However, poor January retail sales data released on Friday temporarily stopped the GBP/EUR exchange rate in its tracks.

Sales including auto fuel grew by only 0.1% on the month and 1.6% on the year, disappointing forecasts for 0.5% and 2.5% respectively.

UK Wage Growth Figures and Second Estimate of 2017 Q4 GDP could Prompt Further GBP/EUR Exchange Rate Weakness

Wednesday and Thursday are likely to be the most impactful days this week in terms of UK economic data, meaning the GBP/EUR exchange rate could see most volatility then.

Wednesday’s jobless and unemployment data will be released at the same time as average weekly earnings figures. If wage growth remains sluggish then Sterling could weaken significantly, especially after Friday’s retail sales figures suggested consumer spending power is already declining.

UK government borrowing figures will also be released, and Bank of England officials Mark Carney, Ben Broadbent, Andy Haldane and Silvana Tenreyro are due to speak in London, so midweek promises to be a busy period for Pound Sterling.

An updated estimate for fourth-quarter UK GDP will be released on Thursday, which could cause more turbulence if it deviates from the initial estimates.

There are plenty of high-impact Eurozone data releases scheduled this week, which could leave the Euro in charge of GBP/EUR exchange rate movement over the next few days.

Tomorrow sees the publication of the ZEW economic surveys and Eurozone consumer confidence data, followed by a slew of preliminary Markit PMIs for France, Germany and the Eurozone as a whole.

Thursday sees the German Ifo sentiment surveys released, as well as the accounts of the 24-25th January monetary policy meeting.

Josh Ferry Woodard

After leaving university in 2011 Josh briefly worked as a currency analyst in the South West of Cornwall. Josh continued monitoring the currency markets and publishing exchange rate analysis after moving to London in 2012, with a particular focus on the impact of economic and political stimuli on forex. Josh was a regular contributor to The Telegraph’s weekly currency feature for several years.

Contact Josh Ferry Woodard