GBP/EUR Reverses Initial Gains Despite Brexit Progress
Phase one of Brexit negotiations is close to being concluded now that the UK government has been able to propose an agreeable solution to the Irish border issue, but the GBP EUR exchange rate has shed initial gains.
The Pound is edging back after sharp appreciation yesterday on the possibility of a deal, as markets digest the £35-£39 billion divorce bill, the new wording of the agreement on the Irish border and the likelihood of achieving a favourable trade deal next year.
Meanwhile the Euro’s advance was softened by the approach of key US data and disappointing German trade and current account balance figures.
Breakthrough for UK in Brexit Deadlock, but Pound Sterling Exchange Rates Prove Lacklustre
After overnight negotiations with Northern Ireland’s Democratic Unionist Party (DUP), the UK government has finally reached an acceptable agreement on the future of the Irish border after Brexit.
This, along with the offer of a divorce bill in the region of £35 billion, has seen the European Council recommend to the European Commission that Brexit talks should be allowed to progress onto the issue of trade.
Market appetite for Sterling remains low as the tense conclusion to phase one of the negotiations – the part that was meant to be solved quickly – has hammered home how much of a challenge the UK faces in securing a favourable trade agreement within the remaining timeframe.
Moody’s Lead Sovereign Analyst for the UK Kathrin Muehlbronner agrees that the road is set to get bumpier, not smoother, for the government;
‘Our baseline scenario assumes that the two sides will agree on a two-year transition period beyond March 2019, that will give some additional time to find a reasonably good new free trade arrangement. But it is clear that these negotiations will likely be even more difficult than those just concluded on the principles of the UK’s withdrawal.’
Disappointing German Trade Data Weighs on Euro (EUR) Exchange Rates
The Euro (EUR) has been unable to capitalise much on the Pound’s (GBP) indecisiveness today after German trade and current account data significantly disappointed predictions.
Economists had expected the enormous German trade surplus would have fallen from €24.1 billion to €21.9 billion in October, but it instead slumped to €18.9 billion.
This had the effect of dragging the current account surplus down from €25.4 billion to €18.1 billion instead of to the €20 billion forecast.
Although leaving the trade and current account surpluses still elevated, such a large slowdown has nonetheless shaken confidence in the Eurozone’s powerhouse economy.
Exports unexpectedly continued to decline in October, falling -0.4% again on the month instead of rebounding to record 1% growth, while imports increased above-forecasts to expand 1.8% after September’s -1.1% contraction.
GBP EUR Exchange Rate Gains Forecast if US Labour Market Data Piles Pressure on Euro
So, what next for the Pound to Euro exchange rate?
Market volatility is likely to continue today on the outcome from last night’s Brexit discussions, with many institutions and political figures having come forward to offer optimism or warnings.
GBP EUR could therefore remain on volatile form over the coming hours, with Sterling caught between short-term positivity and long-term caution.
Meanwhile, although the day’s Eurozone data has all been released, the US non-farm payrolls, unemployment report and University of Michigan sentiment index just published could apply pressure to the Euro.
Job creation in November beat forecasts, clocking in at 228,000 instead of the forecast 195,000, although average hourly earnings growth accelerated less-than-expected to 2.5% instead of 2.7%.