A wave of optimism helped to lift the GBP/EUR exchange rate this morning as UK-EU trade talks were given a further extension, diminishing fears of a no-deal scenario.
Last Week: Fears of No-Deal Brexit Pushed GBP/EUR Exchange Rate to Three-Month Low
The mood towards the Pound soured significantly ahead of the weekend after European Commission President Ursula von der Leyen warned EU leaders that no-deal appeared more probable than a deal.
This sparked a fresh wave of selling pressure that pushed the GBP/EUR exchange rate to its lowest level since late September.
Although the European Central Bank (ECB) followed through with the expected expansion to its quantitative easing programme this was not enough to put any pressure on the Euro, meanwhile.
While ECB President Christine Lagarde indicated that the central bank is still monitoring the exchange rate investors largely shrugged off the statement, keeping the single currency on a positive footing.
Three Things to Watch out for This Week
1. UK Consumer Price Index
Support for the Pound could weaken once again in the days ahead, though, on the back of November’s UK consumer price index report.
With the headline inflation rate forecast to ease from 0.7% to 0.6% on the year the case for fresh Bank of England (BoE) policy action could build, to the detriment of the GBP/EUR exchange rate.
2. Eurozone Services PMI
Anxiety over the health of the Eurozone economy could pick back up on Wednesday, meanwhile, if the latest Eurozone services PMI falls deeper into contraction territory.
Evidence that the service sector experienced a further loss of momentum in December would raise the risk of a fourth quarter growth contraction, leaving the Euro exposed to downside pressure.
3. UK-EU Trade Talks Outcome
Developments in UK-EU trade talks look set to remain the dominant influence on the GBP/EUR exchange rate in the coming week, however.
As long as hopes of a potential deal stay alive this could keep the Pound from losing any significant ground to its rivals, with fears of a greater economic slowdown likely to ease as long as investors see an agreement on the horizon.
GBP/EUR Outlook
As speculation over the outcome of the ongoing UK-EU trade talks continues this could provoke further sharp moves for the GBP/EUR exchange rate this week.