Pound to Euro Lifted as Brexit Trade Talks Continue past Deadline, USD Volatile amid US Political Uncertainty

GBP/EUR Exchange Rate – Brexit Uncertainty Drives Volatility as Talks Continue past Deadline

The Pound to Euro exchange rate fluctuated through the last week over contrasting reports on Brexit trade deal talks between the UK and EU.

Reports of deadlock on a number of key issues weighed on GBP, while Sterling rebounded to higher levels on optimism that the outline of a deal is within sight.

However, the UK latest jobs report tempered Pound gains from Brexit optimism as unemployment hit higher-than-expected levels at 4.5%, a three-year high while redundancies rose at a record pace.

With the UK government confirming today that it will not walk away from talks despite its self-imposed deadline, the Pound soared higher.

Going forward, Sterling will continue being highly sensitive to the progress in UK-EU talks, with fluctuations likely depending on progress.


GBP/USD Exchange Rate – Underwhelming GDP Report Limits Pound Appeal

The mood towards the Pound soured slightly as August’s UK gross domestic product figures disappointed at the end of last week, raising concerns the UK’s economic recovery is slowing.

Confidence in the outlook of the economy weakened as growth momentum slowed more than expected from 6.4% to 2.1% on the month, with the year-on-year figure showing a deeper-than-forecast contraction.

However, Brexit progress optimism offset this week data heading into the weekend, before Brexit dominated again causing swings in the Pound to US Dollar exchange rate.

While the Pound has clawed back losses against USD on Brexit optimism, GBP could come under pressure as coronavirus restrictions potentially tighten under the UK’s new tier system, hitting the UK’s economic recovery.


USD/GBP Exchange Rate – US Stimulus Uncertainty and Election Speculation Drive USD Volatility

The US Dollar struggled amid upbeat trading conditions over the last week as hopes picked up of a US fiscal stimulus package agreement before the election.

However, stimulus optimism faded again following House Speaker Nancy Pelosi’s rejection of Donald Trump’s $1.8 trillion offer as it ‘falls significantly short’, offering the safe-haven ‘Greenback’ support.

Meanwhile, the US Dollar failed to find encouragement from the Federal Reserve emphasising that it has not made an ‘unconditional commitment’ to keeping interest rates low for the foreseeable future.

Looking ahead, market sentiment based on speculation surrounding the upcoming election and developments in any fiscal stimulus will continue shifting risk appetite, with the ‘Greenback’ set to gain as a result of any risk-off trade.


EUR/USD Exchange Rate – German Economic Sentiment Decline Weighs on the Euro

A surprise decline in German economic sentiment put the Euro under fresh pressure this week, following last week’s decline in industrial production, and undermining earlier hopes of sustained recovery.

The latest ZEW surveys highlighted economic sentiment dropped to its lowest levels since May due to uncertainty stemming from Europe’s Covid-19 resurgence, Brexit and the US election.

Confirmation later in the week that the Eurozone consumer price index slipped deeper into negative territory on the year in September could put additional pressure on EUR exchange rates.

As long as inflation continues to trail significantly below the European Central Bank’s (ECB) 2% target, this looks set to keep the Euro biased to the downside as markets brace for additional policy action.

Louisa Heath

Contact Louisa Heath