Pound Sterling to Euro (GBP/EUR) Exchange Rate Tumbles Back from 2020 Best after Brexit

Pound to Euro Exchange Rate Falls Back from Last Week’s Rally

The Pound Sterling to Euro (GBP/EUR) exchange rate fell back from its best levels when markets opened this morning. This was despite the Euro’s (EUR) own limited strength.

It follows last week’s impressive Pound (GBP) performance. The British currency was able to sustain gains even against a more resilient Euro.

GBP/EUR spent much of the week lower, but ultimately climbed from the interbank level of 1.18 to 1.19 throughout the week. GBP/EUR closed the week just below its best levels all year so far.

This morning though, the Pound to Euro exchange rate fell again as investors sold the Pound back from last week’s rally. At the time of writing, the pair was trending in the interbank region of 1.18 again.

Pound (GBP) Exchange Rate Returns to Brexit Focus but Data Still Eyed

Last week, investors piled into the Pound (GBP) amid relief that the Bank of England (BoE) had not taken a more dovish voting stance on UK monetary policy in its January policy decision.

Even with Brexit taking place on Friday, the Pound continued to climb towards the end of the week. It gained on hopes that Britain’s economy was seeing a post-election rebound and that the BoE would not see additional pressure to loosen monetary policy.

However, the Pound quickly tumbled when markets opened this morning, shedding most of last week’s gains against the Euro (EUR).

This is because now that Britain has left the EU, there is concern that Britain’s relationship with the EU could worsen. On Sunday, reports emerged that UK Prime Minister Boris Johnson would refuse close alignment with EU rules in the new UK-EU relationship.

According to Neil Wilson, Chief Market Analyst at Markets.com:

‘Britain won’t align; the EU demands it. The scene is set for a showdown and a rocky path for negotiations that introduces new headline risk for the pound – think back to last year and the way GBP pairs were moving around wildly on any report about deal or no deal.’

Euro (EUR) Exchange Rates Lack Drive as Rivals Recover

For much of last week, stronger than expected Eurozone data helped the Euro (EUR) to hold its ground and avoid being pushed lower by a rising Pound (GBP).

This was also due to mixed performance in the Euro’s biggest rival, the US Dollar (USD). The safe haven US Dollar had been gaining on market coronavirus concerns, but the currency’s safe haven rivals like the Japanese Yen (JPY) were even stronger.

With US Dollar (USD) weaker than safe haven rivals, the Euro was able to benefit due to the negative correlation the Euro and US Dollar share.

However, this is also why the Euro was unable to capitalise on the Pound’s weakness this morning.

The US Dollar (USD) rebounded much of last week’s weakness, pushing the Euro down and limiting GBP/EUR losses. The Euro’s gains were limited by rebounds from last week’s movements even though Eurozone PMIs beat forecasts.

Pound to Euro (GBP/EUR) Exchange Rate Sees Downside Risks Ahead

The Pound to Euro (GBP/EUR) exchange rate may do a better job of recovering and returning to weekend highs, if upcoming UK data impresses or Eurozone data disappoints.

UK construction PMI data will be published tomorrow, followed by Eurozone and UK services and composite PMI data on Wednesday.

These will give investors the most solid idea thus far of how the respective economies performed in January.

Stronger than expected UK data would further boost hopes of an economic rebound. However, if data falls short than investors may lose confidence in the possibility of a rebound in activity.

In fact, analysts predict that the Pound may have further to fall as Brexit uncertainties return. According to Mortgen Lund, Strategist at Danske Bank:

‘Looking ahead, there are more downside risks to the Pound as investors gauge the progress of the Brexit negotiations,’

As a result, the Pound to Euro (GBP/EUR) exchange rate may continue to see pressure this week depending on potential Brexit developments, even if upcoming UK data potentially beats forecasts.

Josh Jeffery

Contact Josh Jeffery