Lack of Major Surprises in Italy-EU Tensions Leaves Pound to Euro Exchange Rate Outlook Largely Unchanged
UPDATE: While the EU did reject Italy’s budget plan, both Italy and the EU have expressed a desire to reach some kind of agreement rather than continue to dig in their heels.
Analysts predict that as officials from Italy and the EU discuss possible ways to reach an agreement, the issue may not be settled for quite some time and may even continue in the background into 2019.
Unless there are some more notable political developments, the Pound to Euro (GBP/EUR) exchange rate is more likely to react to Eurozone consumer confidence data tomorrow.
Pound Sterling to Euro (GBP/EUR) Exchange Rate Slides Despite Italy-EU Clashes
UPDATE: Pound to Euro Exchange Rate Slips on Speculation Italy and EU Can Reach Agreement
Early-afternoon on Wednesday, the European Commission confirmed that it had rejected Italy’s controversial budget plan.
However, as both Italy and the EU have expressed a willingness to try to come to some kind of agreement, the Euro (EUR) actually strengthened slightly instead of falling.
The Pound to Euro (GBP/EUR) exchange rate was trending close to its worst November levels at the time of writing, as Brexit jitters kept pressure on the Pound (GBP) while the Euro edged higher.
Despite previous panic and uncertainty about Italy-EU tensions, markets still generally expect some kind of reconciliation to be reached.
Optimism over Brexit Deal Keeps Pound to Euro (GBP/EUR) Exchange Rate from Falling Further
Despite last week’s significant losses, the Pound Sterling to Euro (GBP/EUR) exchange rate has trended within a tighter margin this week so far as investors anticipate more political disturbances.
Last week saw GBP/EUR plunge two cents, from €1.14 to €1.12. Since then though, GBP/EUR movement has been limited and both the Pound (GBP) and Euro (EUR) have been left looking unappealing, with investors hesitant to buy either currency as political fears increase.
While UK Prime Minister Theresa May has not yet faced a leadership challenge, concerns remain that her Brexit bill will not be popular enough to pass through Parliament. This is limiting Sterling demand.
As for the Euro, investors are anxious amid expectations that the EU will take steps to discipline Italy over its controversial budget plans sometime today.
Pound (GBP) Exchange Rates Unappealing amid Brexit Deal Uncertainties
Sterling’s (GBP) volatility has persisted in recent sessions, with the future of Theresa May and her Brexit deal still largely up in the air.
Since the beginning of the week, fears that Theresa May could be about to face a leadership challenge have lessened slightly, as the 48 letters of no-confidence needed to trigger a challenge have not arrived.
Hopes that May’s leadership will survive the coming months have made Sterling slightly more appealing as it would limit some of the biggest uncertainties surrounding Brexit.
However, while Sterling has held above its worst levels thanks to these hopes, other factors are limiting Pound demand by weighing on the perceived likelihood that the Brexit deal will even be able to pass through Parliament.
As May heads to Brussels today, markets remain concerned about her loss of domestic support. This week, Northern Ireland’s Democratic Unionist Party (DUP) indicated it would not back May’s Brexit plan.
Euro (EUR) Exchange Rates Volatile as Investors Await Italian Budget Developments
Early on Wednesday morning, investors sold off the Euro (EUR) on speculation that the EU was preparing to take the first steps in disciplining Italy for refusing to alter its controversial budget plans.
However, the Euro began to fluctuate a little as reports came in suggesting that Italy may be open to reviewing its budget after all.
According to newspaper La Stampa, Italian Deputy Prime Minister Matteo Salvini was prepared to reduce the planned government spending.
Michael McCarthy, Chief Markets Strategist at CMC Markets, offered his take on the situation:
‘The potential for a further tussle between Rome and Brussels can have an impact on the overall Eurozone economic growth, which will keep the euro under pressure,’
On top of this, the Euro has been able to more easily hold off Sterling’s recovery attempts thanks to weakness in the US Dollar (USD), the Euro’s biggest currency rival.
Pound to Euro (GBP/EUR) Exchange Rate Could Slide on Positive Italian Budget Developments
The European Commission (EC) is expected to reveal its stance regarding Italy’s controversial budget plans today, and investors are hesitant to move much on the Euro (EUR) until things becomes clearer.
If the EC shows firm intent to discipline Italy and little sign that it is willing to negotiate, the Pound to Euro (GBP/EUR) exchange rate could climb as investors sell the Euro.
On the other hand, signs that Italy and the EU could negotiate the budget plan would be a relief to investors and the Euro would likely climb.
In this scenario, the Pound to Euro exchange rate, which is already near its November lows, could slide even lower.
As for the Pound, domestic UK political developments are in focus as Theresa May is expected to prepare for the Sunday UK-EU summit, where she hopes her deal will be finalised.
Amid a lack of notable data due to be published in the coming sessions, the Pound to Euro (GBP/EUR) exchange rate will likely be driven by UK and Italian political developments in the coming sessions.