The Pound to Euro exchange rate plunged to a fresh two-month low at the start of this week’s session due to fears that UK Prime Minister Theresa May will outline plans to break away from the EU single market on Tuesday.
‘Hard Brexit’ Fears Weigh On Sterling
GBP/EUR began last week’s session on the back foot, declining rapidly in reaction to comments from the UK PM which appeared to put Britain on a path out of the single market. May said Brexit was ‘not about keeping bits of [EU] membership’ and insisted that the historic vote would give the government back ‘full control’ of its borders. Most analysts considered the remarks to mean that retaining full access to the single market was not going to be a priority.
These ‘hard Brexit’ fears continued to weigh on demand for the Pound throughout the week.
On Wednesday UK data printed positively, with manufacturing production coming in at 1.3%, smashing forecasts of 0.5%, while industrial output rose 2.0% compared to estimates of 0.6%. However, the prevalence of Brexit anxieties prevented Sterling publishing any gains versus the single currency.
PM May Weighs In Again
Demand for the Pound took another beating on Thursday when a spokesperson from Downing Street said that PM Theresa May would be outlining her plans for Brexit in a speech. Although the announcement gave nothing new away, the market reaction was almost entirely negative, because traders expected the PM to finally admit what she has been hinting at since taking office; that Britain is likely to lose access to the single market after Brexit.
In Europe it was reported that European Central Bank policymakers were split on whether to prolong asset purchases in December, with some arguing that the multibillion Euro scheme was not effective. However, the majority voted to extend QE until the end of 2017 and this meant that the single currency was unable to pick up any additional bids.
Sterling Receives Another Dose Of PM May
The Pound to Euro exchange rate suffered another dose of PM May over the weekend, with GBP/EUR completing a three-cent weekly depreciation thanks to comments from a government source in the Sunday Times. The paper reported that May was planning to announce on Tuesday that she intends to take Britain out of the single market and the customs union, in order to achieve greater controls on immigration. This prompted another sharp sell off in Sterling and brought GBP/EUR to a fresh two-month low.
Week Ahead
Although UK inflation is set to rise from 1.2% to 1.4% (its highest level since the middle of 2014) and unemployment is tipped to remain at an 11-year low of 4.8% this week, the Pound may well struggle to rally versus the Euro. The ECB is due to announce monetary policy for January on Thursday but no major changes are expected.
After a week of ‘hard Brexit’ speculation and negative Sterling sentiment, it is the PM Theresa May who is likely to steal the show again this week. If her speech on Tuesday does indeed make it clear that British businesses will need to make plans for a future outside of the single market then the Pound could slide further. There is a chance that May will change tack, but at the moment it looks very likely that Britain is heading for a clean break from the European Union.