Pound Euro Exchange Rate Forecast: GBP Surges Higher on Brexit Transition Agreement Breakthrough

Update: Brexit Transition Deal Breakthrough Boosts Pound Euro Exchange Rate

In a positive step forward, Brexit secretary David Davis and chief EU negotiator Michel Barnier announced that the two sides have reached a ‘complete accord’ on citizens rights and the UK’s financial settlement.

While issues such as the Irish border remain this nevertheless represents solid progress towards a final transition agreement, giving investors fresh cause for confidence in the Pound.

This encouraged the Pound to Euro (GBP/EUR) exchange rate to extend its bullish run further, with hopes boosted for further progress at the upcoming EU summit.

Optimistic ECB Inflation Forecasts Fail to Dent Pound Euro Exchange Rate

The Pound to Euro (GBP/EUR) exchange rate continued its push higher at the start of the week, benefitting from a sharper-than-forecast narrowing of the Eurozone trade surplus.

Even though a number of European Central Bank (ECB) policymakers have recently expressed confidence in the inflationary outlook this has not been enough to bolster demand for the Euro (EUR).

ECB Governing Council members Klaas Knot and Francois Villeroy de Galhau both noted that the outlook for consumer prices appears solid, even though inflation is picking up at a slower pace than previously hoped.

This naturally encouraged bets that the central bank could continue to shift away from its dovish policy bias over the coming months, so long as domestic data continues to print positively.

However, after the disappointing nature of last week’s Eurozone consumer price index and German wholesale price index figures investors were inclined to take this hawkishness with a pinch of salt.

Brexit Jitters Forecast to Limit Pound Exchange Rate Upside

Speculation over Brexit looks set to limit the upside potential of GBP/EUR exchange rate over the course of the week, though.

Markets are hoping to see signs of progress at the latest EU summit, especially as UK and EU officials have appeared so at odds over key issues.

With little more than a year now left until the official exit deadline of March 2019 any prospect of a delay in reaching an agreement could weigh heavily on the minds of investors.

Even so, the Pound is also forecast to see volatility in response to the latest Bank of England (BoE) policy decision on Thursday.

While no change in interest rates is anticipated at this juncture, GBP exchange rates could still come under pressure as a result of the accompanying meeting minutes.

If policymakers show fresh signs of hawkishness, however, this may spur the GBP/EUR exchange rate to extend its recent bullish run.

Tuesday’s UK consumer price index data will also be in focus, with any easing in price pressures likely to encourage doubt over the likelihood of an imminent BoE rate hike.

Euro Exchange Rate Momentum to Remain Muted on Weaker Eurozone PMIs

Although it is a less busy week for Eurozone data, the GBP/EUR exchange rate could still see some downside pressure on the back of the latest raft of manufacturing and services PMIs.

Forecasts point towards a slight loss of momentum across the board in March, even though growth is still thought to have remained robust.

This may dampen the appeal of the Euro further, in spite of the more optimistic outlook of ECB policymakers.

Meanwhile the relative uncertainty that continues to hang over Italy’s political situation should keep EUR exchange rates on a generally softer footing.

With the political impasse unlikely to be broken in the near future, and any resulting government probably being rather fragile in nature, Italy looks set to remain a weak point for the Eurozone for some time to come.

Hannah Wilson

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