Pound Euro (GBP/EUR) Exchange Rate Proves Volatile in Response to UK and Italian Politics

GBP/EUR Exchange Rate: Mixed UK PMIs Point towards Limited Third Quarter Growth

Confidence in the underlying health of the UK economy was not improved by September’s PMIs, with both the construction and services indexes falling short of forecast.

While all three PMIs remained within expansion territory, signalling continued sector growth, there were fresh signs of Brexit-based uncertainty weighing on the economy.

With business confidence declining the appeal of the Pound was limited, with any sense of certainty over Brexit still looking a distant prospect.

This suggests that the third quarter UK gross domestic product is unlikely to see any improvement on the quarter with the economy looking set to remain under pressure throughout the remainder of the year.

Even if September’s Halifax house price index surprises to the upside this may not be enough to support GBP exchange rates.

GBP/USD Exchange Rate: Pound Muted as Conservative Rift over Brexit Persists

The Conservative Party conference prompted additional volatility for the Pound, with MPs still proving split on key Brexit issues.

As former foreign secretary Boris Johnson launched a fresh attack on Theresa May’s Brexit plans GBP exchange rates came under pressure.

The threat of a potential leadership challenge continued to hang over May this week, limiting the strength of the Pound as political jitters dominated.

Until the government can establish a unified position on Brexit and rumbles of a possible change in leadership fade Sterling will remain vulnerable to fresh bouts of weakness.

USD/GBP Exchange Rate: US Dollar Gains After Fed Interest Rate Hike

In the wake of the Federal Reserve’s widely-anticipated interest rate hike the mood towards the US Dollar picked up, even though the odds of a further 2018 rate hike remain mixed.

Although the agreement of a new US-Canada trade deal dented USD exchange rates on Monday, as market risk appetite increased, this failed to weigh on sentiment for long.

Tensions in the Eurozone and a solid reading from September’s ISM manufacturing index helped to shore up the US Dollar.

A further boost could be in store for USD exchange rates on Friday if August’s US unemployment rate falls from 3.9% to 3.8% as forecast.

Evidence of continued tightening within the domestic labour market would give the Federal Reserve greater cause for hawkishness, benefitting the US Dollar.

EUR/USD Exchange Rate: Italian Budget Row Weighs on Euro

News that the Italian government is targeting a 2.4% budget deficit in 2019, in contravention of EU budget rules, prompted the Euro to slump sharply.

Comments from some senior members of the coalition government suggesting that Italy could benefit from returning to its own currency also spooked markets.

However, the single currency was able to regain some ground on Wednesday after reports indicated that Italy is willing to lower its deficit back towards the 2% EU mandate in 2020 and 2021.

Even so, as the German economy has continued to show signs of slowing momentum the potential for a sustained Euro recovery looks limited.

A fresh contraction in German factory orders in August could well drive EUR exchange rates lower across the board, highlighting the economy’s continued vulnerability to global trade conditions.

Hannah Wilson

Contact Hannah Wilson