The mere hint of progress in Brexit negotiations bolstered the appeal of the Pound last week, and sturdy UK inflation data could lead to further GBP/EUR exchange rate gains over the next few days.
Brexit Hope Boosts Pound to Euro Exchange Rate
Sterling posted gains versus the single currency last week following rumours that EU chief negotiator Michel Barnier was planning to offer Britain the chance to stay in the EU single market and customs union in exchange for the UK settling its financial obligations, sorting out the Irish border and securing the rights of EU citizens. If true, this would mark an important shift as EU officials had previously stated that no future trade talks would be held until the divorce was settled.
If this rumoured olive branch from EU leaders is offered it could lead to a breakthrough in the talks and could easily trigger another round of Sterling rallies.
Indeed, the Pound is likely to strengthen if the threat of a cliff-edge Brexit is seen to be decreasing and the prospect of a two-year transitional deal is seen increasing. This is because a transitional deal would allow businesses to plan ahead past the March 2019 Brexit deadline, and would therefore be expected to boost investment and economic activity.
GBP/EUR Could Strengthen on Strong UK Inflation
The Pound has gained some momentum coming into this week’s session and investors could send GBP/EUR higher if Tuesday’s UK inflation report is seen to support Bank of England rate hike expectations. Markets are primed for the CPI print to come in at a new five-year high of 3.0% for September, up from 2.9% in August.
In contrast, the Eurozone inflation report is tipped to see price pressures remain below the European Central Bank’s 2.0% target, at just 1.5%. The single currency is also coming under pressure from uncertainty surrounding Catalonia’s bid for independence.
The Pound to Euro exchange rate also has the potential to rally if Wednesday’s UK labour market report sees unemployment remain at 42-year lows of 4.3%, as expected. Sterling traders will be paying special attention to the average earnings section of the report, which is anticipated to remain at 2.1%. Any positive surprises would likely boost BoE rate hike bets and send GBP/EUR on an upward path.