The Pound initially rallied versus the Euro (GBP/EUR) last week on news that German coalition talks had broken down.
However, a bleak set of domestic forecasts in the Autumn Budget and signs of progress in Germany have since dragged GBP/EUR lower.
GBP/EUR Exchange Rate Volatile
Last week saw Sterling post gains against the Euro (GBP/EUR) as investors reacted to a breakdown in German coalition talks.
The Pound was also boosted by speculation that UK Prime Minister Theresa May had been authorised by the Tory party to increase Britain’s Brexit divorce payout to the EU.
However, as the week went on, demand for the Euro picked up and the GBP/EUR exchange rate gave up its initial gains.
Holders of Sterling were spooked by downgraded economic forecasts in the latest budget.
The Office for Budget Responsibility estimated that UK GDP would come in at 1.5% this year, down from 2.0% previously, while predictions for 2018 and 2019 were also downgraded.
Productivity growth was revised down from 7.5% to 5.7% over the next five years and analysts at the Institute for Fiscal Studies warned that Britain could be facing two decades of lost wage growth.
GBP/EUR Forecast: German Coalition & Brexit Talks in Focus
Over the weekend, the leader of Germany’s Social Democrats (SPD), Martin Schulz, announced that his party would enter talks with Chancellor Angela Merkel’s Christian Democratic Union (CDU) to form a grand coalition.
The news buoyed the Euro as it could prevent another general election and a prolonged period of political uncertainty.
So long as the coalition talks continue in a constructive manner, we could see the single currency tick a little higher over the next week.
In terms of Brexit, UK PM Theresa May has yet to make an increased offer to the EU but has been given a deadline of 4th December to do so.
This means that if European leaders are not satisfied with the UK’s Brexit proposals (divorce bill, Irish border and rights of EU citizens) then Sterling could suffer sizable losses, as this would delay the beginning of future trade negotiations and further raise the possibility of Britain crashing out of the union in March 2019 with no transitional arrangement.
The significance of the 4th December deadline suggests that we could see GBP/EUR trade with enhanced sensitivity to Brexit headlines over the next seven days.
Eurozone Inflation Could Boost Euro (EUR) Exchange Rates
There are not many releases on the GBP/EUR data calendar this week that look capable of driving movement in the currency pair.
However, we could see the Euro increase in demand if the November Eurozone consumer price index rises from 1.4% to 1.6%, as expected.
UK manufacturing data is tipped to inch higher from 56.3 to 56.5 but the report will likely be overshadowed by Brexit developments.
Data Affecting the GBP/EUR Forecast This Week
29th November EUR German Consumer Price Index (YoY) (NOV P)
30th November EUR Euro-Zone Unemployment Rate (OCT)
30th November EUR Euro-Zone Consumer Price Index Estimate (YoY) (NOV)
1st December GBP Markit UK PMI Manufacturing s.a. (NOV)