Pound Euro (GBP/EUR) Exchange Rate Slumps as Brexit Talks Hit Deadlock Over Irish Border

Brexit Deadlock over Irish Border Drags GBP/EUR Exchange Rate Lower

UPDATE: The Pound Sterling to Euro (GBP/EUR) exchange rate extended its losses as fears of a potential collapse in Brexit talks flared up.

Reports that a call between Boris Johnson and German Chancellor Angela Merkel yielded a deadlock over the Irish border issue saw the Pound fall sharply out of favour.

The growing risk of the two sides failing to reach an agreement ahead of the current Brexit deadline put GBP exchange rates under significant strain, adding to existing bearishness.

UK Labour Productivity Decline Drags on Pound Sterling Euro (GBP/EUR) Exchange Rate

Confirmation that UK labour productivity remained in decline in the second quarter kept the Pound Sterling to Euro (GBP/EUR) exchange rate on the back foot.

With the domestic economy continuing to demonstrate signs of slowing in the face of ongoing Brexit-based uncertainty the mood towards Pound Sterling (GBP) naturally soured.

As markets saw little signs of progress towards a workable Brexit agreement in the wake of Boris Johnson’s recently revealed proposal, a sense of political and economic anxiety weighed heavily on GBP exchange rates.

Until a greater degree of clarity over the UK’s future relationship with the EU emerges support for the Pound looks set to remain limited.

EUR Exchange Rates Rebound after Surprise German Industrial Production Gains

Demand for the Euro (EUR) picked up, meanwhile, after an unexpectedly positive German industrial production report.

While forecasts had pointed towards another month of contraction the production data instead delivered a modest increase of 0.3% in August.

This surprise growth ran counter to yesterday’s underwhelming German factory orders data, suggesting a greater degree of resilience within the Eurozone’s powerhouse economy.

As a result, EUR exchange rates returned to a positive footing this morning, in spite of lingering worries over the risk of Germany falling into an imminent technical recession.

Commenting on the production data, Peter Vanden Houte, Chief Economist at ING, noted:

‘This is finally some good news coming from the biggest economy in the Eurozone. However, there is no reason to get overexcited. Industrial production is always volatile during the summer months, so September will be more important to assess whether we can really talk about a trend reversal.’

Narrowed German Trade Surplus Forecast to Dent Euro (EUR)

Support for EUR exchange rates could fade in the days ahead as markets brace for the latest German trade report.

Investors anticipate a sharp narrowing of August’s trade surplus, reflecting the general deterioration in global trade conditions in recent months.

Fresh evidence of a weakening German trade outlook could weigh heavily on the Euro, with soft trade likely to limit the potential for economic growth in the third quarter.

With markets already seeing a high risk of a second consecutive quarter of contracting growth any weakness here may offer the GBP/EUR exchange rate a solid rallying point.

Unless German export volumes show a significant improvement on the month support for the single currency looks set to deteriorate on Thursday.

GBP/EUR Exchange Rate Vulnerable to Evidence of Slowing UK Growth

Confidence in the UK outlook could also weaken with the release of August’s monthly gross domestic product.

With forecasts suggesting a stagnation in growth the Pound looks vulnerable to fresh selling pressure in the near term.

Although July’s monthly GDP saw a strong performance, clocking in at 0.3%, any sharp slowdown in domestic growth momentum could put a dampener on the GBP/EUR exchange rate.

As markets remain wary of the potential for the UK to slip into a state of recession in the third quarter a weak month of growth is likely to drag on the appeal of Pound Sterling.

On the other hand, if the UK economy demonstrates a greater degree of resilience in the face of persistent Brexit anxiety this may give the GBP/EUR exchange rate a sharp boost.

Louisa Heath

Contact Louisa Heath