Lack of Support for Irish Backstop Sends Pound Sterling Euro (GBP/EUR) Exchange Rate Lower
With both Conservative leadership candidates appearing to abandon the idea of the Irish backstop the Pound Sterling to Euro (GBP/EUR) exchange rate slumped to a six-month low.
These latest comments from Boris Johnson and Jeremy Hunt prompted a fresh bout of market anxiety over Brexit, with the risk of a no-deal scenario continuing to mount.
This limited the positive impact of May’s raft of UK employment and earnings data, even though wage growth bettered forecasts.
While weekly earnings in the three months to May accelerated 3.6%, far outpacing inflation, this was not enough to offer the GBP/EUR exchange rate a rallying point in the face of persistent Brexit jitters.
Even with wages growing at their fastest pace in a decade the case for a Bank of England (BoE) interest rate rise remains lacking, to the detriment of Pound Sterling.
Slump in German Economic Sentiment Weighs on Euro (EUR) Outlook
However, the appeal of the Euro (EUR) also proved limited this morning thanks to another monthly decline from the German ZEW economic sentiment survey.
As the index dropped from -21.1 to -24.5 in July this demonstrated a continued weakening of confidence within the Eurozone’s powerhouse economy.
With the growth outlook already appearing muted this latest disappointment weighed heavily on EUR exchange rates as fears of a potential recession persisted.
Nevertheless, this was not enough to lift the GBP/EUR exchange rate at this stage, especially as the Eurozone trade surplus widened further than forecast in May.
GBP/EUR Exchange Rate Vulnerable to Stagnant Monthly UK Inflation
The mood towards the Pound could sour further tomorrow if June’s UK consumer price index data fails to impress.
Investors expect to see the inflation rate stall on the month, however, leaving GBP exchange rates vulnerable to additional downside pressure.
While a lower level of inflation would offer an extra boost to wage growth this would also give BoE policymakers greater incentive to consider loosening monetary policy before the end of the year.
As anxiety over Brexit continues to mount the risk of a BoE interest rate cut also looks set to increase, limiting the potential for Pound Sterling gains.
Unless the headline inflation rate shows signs of moving towards the BoE’s 2% target the GBP/EUR exchange rate is unlikely to recover much ground in the near term.
Underwhelming Eurozone Inflation Set to Keep Euro Under Pressure
As June’s finalised Eurozone consumer price index is not expected to see any change from its initial estimate any impact on the Euro could prove limited.
With the European Central Bank (ECB) already looking set to loosen monetary policy before the end of the year the appeal of the single currency appears unlikely to improve.
Unless the inflation data sees a surprise upward revision EUR exchange rates could remain on the back foot on Wednesday.
Even so, if May’s Eurozone construction output figures point towards solid expansion within the construction sector this may help to limit the pressure on the Euro.