Pound Sterling to Euro (GBP/EUR) Exchange Rate Loses Traction After Disappointing EU Summit

Lack of Brexit Progress Weighs Heavily on Pound Sterling Euro (GBP/EUR) Exchange Rate

UPDATE: Confidence in Pound Sterling (GBP) continued to deteriorate over the course of the afternoon as hopes of any progress on Brexit faded.

Theresa May’s failure to gain any fresh guarantees over the Irish backstop or other concessions from EU leaders left investors with little cause for confidence in the Pound.

As the initial impact of the disappointing Eurozone PMIs faded this left the Pound Sterling to Euro (GBP/EUR) exchange rate trending lower once again.

However, as confidence in the outlook of both the UK and Eurozone economies proved limited the losses of the GBP/EUR exchange rate ultimately proved limited heading into the weekend.

A stronger US Dollar (USD) and worries over the health of the global economy both put additional downside pressure on the Euro (EUR), meanwhile.

Euro (EUR) Exchange Rates Slump as Eurozone Growth Slowdown Continues

The Euro (EUR) came under fresh pressure this morning as December’s raft of Eurozone manufacturing and services PMIs fell short of forecast.

This confirmed that the Eurozone failed to regain its lost momentum in the fourth quarter, leaving EUR exchange rates on a weaker footing as growth fell to its lowest level in four years.

Investors were particularly concerned by the sharp decline seen in the French data, with both the manufacturing and service sectors falling into a state of contraction on the month.

Commenting on the data Chris Williamson, Chief Business Economist at IHS Markit, noted:

‘While some of the slowdown reflected disruptions to business and travel arising from the ‘yellow vest’ protests in France, the weaker picture also reflects growing evidence that the underlying rate of economic growth has slowed across the euro area as a whole.

‘Companies are worried about the global economic and political climate, with trade wars and Brexit adding to increased political tensions within the euro area.’

Lack of Progress at EU Summit Leaves Pound Sterling (GBP) Exchange Rates under Pressure

However, the Pound Sterling to Euro (GBP/EUR) exchange rate failed to capitalise on the weakness as markets reacted with disappointment to Theresa May’s performance at the latest EU summit.

As May failed to break any fresh ground on Brexit, with EU leaders refusing to reopen negotiations over the Withdrawal Agreement, this left investors with little incentive to favour the Pound.

Although political jitters have eased in the wake of the failed Conservative leadership challenge, with MPs unable to launch another bid to unseat May for twelve months, this failed to keep GBP exchange rates on a positive footing.

A sense of unease continues to hang over the UK outlook as May’s Brexit deal still seems unlikely to secure sufficient backing when it finally comes before Parliament.

With the risk of a general election, no-deal Brexit or possible second referendum all rising the mood towards the Pound has naturally remained muted.

Narrowed Eurozone Trade Surplus to Dent Euro (EUR) Exchange Rates

October’s Eurozone trade balance figure could put additional pressure on the Euro next week as forecasts point towards a narrowed surplus.

Any fresh signs of weakness within the Eurozone economy are likely to add to the bearish mood of the single currency, even though global trade tensions have shown signs of easing in recent weeks.

With the European Central Bank (ECB) looking set to leave interest rates on hold for longer the upside potential of EUR exchange rates appears limited.

The latest German IFO business sentiment surveys may encourage further Euro selling if confidence shows further signs of deterioration.

Unless investors see signs of greater resilience and optimism for 2019 the GBP/EUR exchange rate is likely to find support on the back of a weaker Euro.

UK Inflation Data Forecast to Provoke Fresh GBP/EUR Exchange Rate Volatility

Although political developments look set to remain the key influence on the Pound in the days ahead Wednesday’s UK consumer price index data is likely to provoke additional volatility.

An uptick in inflationary pressure would increase the pressure on the Bank of England (BoE) to consider raising interest rates sooner rather than later, in spite of Brexit uncertainty.

On the other hand, a weakening in the headline CPI could leave the Pound exposed to fresh downside bias as the case for further BoE tightening fades.

Signs of higher inflation may also weigh on the Pound Sterling to Euro (GBP/EUR) exchange rate, however, as this could stifle the recent uptick in wage growth.

Hannah Wilson

Contact Hannah Wilson