Softening fears over Catalonia’s independence bid have undermined the Pound Euro exchange rate today, aided by empty UK and Eurozone data calendars.
Markets Back Away from Pound as Chancellor Ignores Calls for Contingency Spending
Brexit fears are once again weighing on the Pound, with markets unsettled by Chancellor of the Exchequer Philip Hammond’s refusal to budget for a ‘no deal’ Brexit.
With the exit negotiations continuing at a sluggish pace, Theresa May warned this week that Britain should be prepared for a Brexit in which the UK has been unable to secure a deal from the EU.
However, she promised that the government would begin preparations for such an event now as a contingency measure, including new spending and investment to ease the impact of the cliff-edge.
This had included new lorry parks outside of Dover to ease congestion as freedom of movement of goods would have ended.
But her plans have been quickly dashed after Hammond refused to budget for any extra spending, as he remains focussed on reducing the deficit.
Writing in The Times, Hammond stated;‘The government and the Treasury are prepared. We are planning for every outcome and we will find any necessary funding and we will only spend it when it’s responsible to do so.’
Pound Euro Exchange Rate Slips Lower despite Catalonia Independence Declaration
Following the 1st October referendum on independence from the rest of Spain, the Catalonian parliament yesterday declared that the region would indeed split from the nation.
Although this was the outcome the markets most feared – and the one that has dragged the Euro lower in previous sessions – it is GBP/EUR that is weakening today.
This is because Catalan regional President Carles Puigdemont stated after declaring the region’s independence that the split would be postponed for several weeks to allow time for talks with the Spanish government in Madrid.
This means that not only will the status quo continue for some months until an agreement is finalised, but also the door is left open to Catalonia remaining a part of Spain if Madrid can offer it favourable terms.
IG market analyst Joshua Mahony notes; ‘European markets are looking towards Spain for inspiration, as the decision from Catalan leader Carles Puigdemont to delay a declaration of independence has led to a sharp rise in the IBEX and euro.’
BoE Credit and Bank Surveys Forecast to Boost GBP/EUR if Financial System Shows Resilience
Today the GBP/EUR exchange rate could wobble in reaction to comments from European Central Bank (ECB) Chief Economist Peter Praet, who is due to speak in New York this evening.
Markets are still expecting the announcement of tapering to the quantitative easing programme as a result of the next monetary policy meeting; hints from Praet that this is still likely will help push the Euro higher.
However, the release of minutes from the US Federal Open Market Committee’s (FOMC) monetary policy meeting in September could undermine Euro demand if they point towards another rate hike this year, which would boost the US Dollar.
The UK monetary policy outlook will be in focus tomorrow as the Bank of England (BoE) will publish the results of its latest credit conditions and bank liabilities surveys.
If the BoE reports that the UK’s financial system is in good shape, this will help support the view that interest rates can be hiked soon without adverse side-effects.
Meanwhile the Eurozone monetary policy outlook will remain in focus thanks to a panel participation in Washington from ECB President Mario Draghi.