GBP/EUR Exchange Rate Recovers Losses after ECB’s Draghi Forecasts Trade War Would Damage Global Economy

GBP/EUR Exchange Rate Closes Week Stronger after Gloomy Forecast for Impact of Global Trade War from ECB President Mario Draghi

Comments from Maltese Prime Minister Joseph Muscat have today helped boost the GBP/EUR exchange rate further, despite his warning that Brexit cannot result in something better than EU membership.

Markets are more interested in his suggestion that the predictions of an exodus of financial services companies from the City of London were overblown.

This is a new admission from Muscat, who has repeatedly warned of the dangers of Brexit.

GBP/EUR Exchange Rate Ends Week Stronger after Gloomy Forecast for Global Trade War Impact from ECB President Mario Draghi

Warnings from Airbus and Vauxhall on Monday and Tuesday respectively weakened the GBP/EUR exchange rate at the start of last week, with both companies saying the lack of Brexit clarity could threaten their future in the UK.

Commenting on the concern that delays with paperwork and customs checks could make the business uncompetitive, Airbus UK Senior-Vice President Katherine Bennett stated:

‘It’s critical for our business to ensure that the wings that we build in Broughton and in Filton can get to France and Germany for the final assembly line.’

‘It’s really important that the parts don’t get held up in warehouses. We have a very just-in-time delivery system.’

Fears of a global trade war following the announcement that the US would levy tariffs on imports of steel and aluminium kept the Pound on muted form for the rest of the week.

A key part of the government’s Brexit plan has seemingly been to quickly secure an extensive trade deal with the US, but markets are questioning how this will be possible when President Donald Trump’s administration seems to be stepping away from international trade in order to focus on domestic interests.

Trade war fears were also weighing on the Euro, however, with other developments in the currency bloc creating bigger downside risks for the common currency and allowing the GBP/EUR exchange rate to claw its way higher by the end of the week.

GBP/EUR Exchange Rate Losses Reversed after ECB President Mario Draghi Issues Gloomy Forecast for US Trade War

Monday saw the Euro softening after the weekend’s Italian general election, which saw support for the ruling centrist Democratic Party collapse as voters turned towards Eurosceptic and far-right parties instead.

Italy could now be facing months of political uncertainty, as seen in Germany following September’s election, with the dominant parties attempting to negotiate a coalition agreement; although the Euro is likely to continue to weaken even after an accord is reached given that it will almost certainly result in a populist government.

What little strength the Euro had managed to gain at the beginning of the week was surrendered on Wednesday, when European Central Bank (ECB) President Mario Draghi undermined some hawkish signs from the Governing Council regarding quantitative easing by warning over the impact of US protectionism and financial deregulation.

While fears of a global trade war sparked by the US were weighing on Pound Sterling, the Euro has not escaped the effect of market jitters, with the EU likely to be one of Donald Trump’s major targets should further import tariffs be levied.

The focus on political and trade outlooks saw the Euro largely ignore the week’s data, with Monday’s disappointing composite and services PMI results, Tuesday’s strong retail figures and Friday’s German trade and industrial production slump having little effect upon EUR.

Spring Statement Forecast to Distract from Brexit Outlook: GBP/EUR Exchange Rate to Weaken on Empty UK Data Calendar?

An entirely empty UK data calendar this week is likely to leave the GBP/EUR exchange rate to fluctuate in response to the evolving outlook for Brexit and the impact this might have upon the domestic economy.

The only forecast distraction that markets might have will be tomorrow’s Spring Statement from the chancellor Philip Hammond.

Hammond will give an update on the UK economy and the latest spending plans, although the Treasury has taken great steps to restrain expectations ahead of the report, stating that the event will contain ‘no red box, no official document, no spending increases, no tax changes.’

The chancellor will reveal updated economic forecasts, so there is the potential for GBP/EUR to appreciate or depreciate depending upon whether the Treasury has become more optimistic or pessimistic in its outlook for Brexit.

Meanwhile, the Euro could see significant volatility thanks to the numerous speeches from European Central Bank policymakers this week.

Wednesday sees ECB President Mario Draghi and officials Peter Praet and Vitor Constancio speak in Frankfurt, while Benoit Coeure speaks in Berlin. Sabine Lautenschlaeger speaks in Florence on Thursday.

Laura Parsons

Laura has been working in the financial services sector since 2012 and provides currency news updates for a number of online and print publications. Over the years she has produced exchange rate analysis for publishers like French Property News, The Express, The Telegraph and Forbes.

Contact Laura Parsons