Pound Euro Exchange Rate Forecast: Brexit Jitters Remain for GBP Ahead of BoE Rate Decision

Update: Pound Euro Exchange Rate Jitters Possible on EU Summit Brexit Developments

While the Pound Euro (GBP/EUR) exchange rate has benefitted from an easing in Brexit-based jitters, after the UK and EU published a joint draft treaty, this optimism may not last.

As the issue of the Irish border remains unresolved, and the proposed agreement faces opposition from Tory backbenchers over the status of the fishing industry, there is still a long way to go before a final deal is reached.

If the tone at the latest EU summit fails to reflect Monday’s optimism the mood towards the Pound (GBP) could sour somewhat, with the issue of Brexit still far from resolved.

Better-than-Forecast UK Wage Growth Boosts Pound Euro Exchange Rate

As UK average weekly earnings bettered forecasts, accelerating 2.8% on the year in the three months to January, the Pound to Euro (GBP/EUR) exchange rate found fresh support.

After Tuesday’s weaker-than-expected consumer price index data this suggests that the long-running wage squeeze may come to an end sooner rather than later.

The stronger showing is also likely to offer encouragement to Bank of England (BoE) policymakers, who have expressed some concern in recent months over the lacklustre nature of domestic wage growth.

With the pressure on earnings easing the Pound (GBP) naturally pushed higher, benefitting from hopes that higher levels of consumer spending will support economic growth in the months ahead.

A persistent sense of Brexit-related optimism also limited the downside potential of the GBP/EUR exchange rate, even though a number of key issues remain unresolved.

Euro Strengthens in Spite of High Federal Reserve Rate Hike Odds

Demand for the Euro (EUR), meanwhile, recovered ahead of the latest Federal Reserve interest rate decision, limiting the gains of the GBP/EUR exchange rate.

As markets have already effectively priced in the impact of the Fed raising interest rates tonight EUR exchange rates found some support.

However, this bout of strength could prove somewhat short-lived if the US central bank proves more confident in its policy outlook.

Upward revisions to policymakers’ latest economic forecasts may see the Euro slump sharply, with the prospect of more aggressive Fed policy tightening not boding especially well for the EUR outlook.

Weaker Eurozone PMIs Forecast to Limit GBP/EUR Exchange Rate Downside

March’s raft of Eurozone manufacturing and services PMIs are forecast to show a slight loss of momentum on the month, offering the GBP/EUR exchange rate a fresh rallying point.

While both sectors are expected to remain comfortably within expansion territory a dip in growth could still discourage confidence in the Euro in the near term.

Focus will also fall on the latest European Central Bank (ECB) Economic Bulletin, with investors hoping to get a fresh gauge on the policy outlook.

Any signs of greater optimism may well fuel bets that the ECB will adopt a more hawkish stance in the coming months, even though the prospect of any policy action remains distinctly limited.

Further Pound Euro Exchange Rate Gains Forecast on Hawkish BoE Minutes

The GBP/EUR exchange rate could make further gains on the back of Thursday’s BoE policy decision, even though interest rates are forecast to remain on hold.

Markets will be more interested in the latest policy guidance in the accompanying meeting minutes, though, as speculation over the prospect of a May rate hike continues.

Evidence that the Monetary Policy Committee (MPC) is considering further policy action could see the Pound pushing higher, potentially climbing to fresh multi-month highs against rivals such as the Australian Dollar (AUD).

If the BoE appears less hawkish in outlook, however, the GBP/EUR exchange rate may return to a downtrend ahead of the weekend.

Hannah Wilson

Contact Hannah Wilson