Reported EU Plans for ‘Privileged’ Post-Brexit Single Market Access Boost Pound Euro (GBP/EUR) Exchange Rate
Anticipation for the latest speech from Brexit Secretary David Davis kept the Pound Sterling to Euro (GBP/EUR) exchange rate on something of a narrow trend, with Brexit-based jitters building once again.
Concerns remain over the relative lack of clarity that the Conservative government has offered on the subject of Brexit, leaving the Pound (GBP) somewhat lacking in market support at the start of the week.
With the possibility of a hard exit still looking more significant than investors would like confidence in the future of the UK economy remained relatively muted.
However, these initial jitters soon dissipated as a leaked report in Business Insider suggested that the European Parliament is preparing a plan to grant the UK so-called ‘privileged’ access to the single market after Brexit.
This Pound bullishness is unlikely to last for particularly long, though, as markets continue to gear up for the start of the next round of formal Brexit negotiations, especially if the report is debunked.
UK Wage Data Forecast to Reserve Some GBP/EUR Exchange Rate Gains
The GBP/EUR exchange rate could come under greater pressure on Wednesday, however, if the latest raft of UK labour market data fails to better forecast.
Unless there are signs that average weekly earnings are picking up pace the mood towards the Pound is likely to remain somewhat bearish, given the Bank of England’s (BoE) concern over wage growth.
With inflationary pressure still far outpacing wage growth the squeeze on UK consumers looks set to persist for some months to come, to the detriment of the wider economy.
Falling consumer spending could well drag on domestic growth in the near term, giving the BoE further cause for caution and reducing the odds of any imminent interest rate hike.
If commentary from BoE policymakers fails to show any particular hawkishness in the coming days the GBP/EUR exchange rate could struggle to find meaningful traction.
Euro (EUR) Exchange Rate Volatility Forecast Ahead of Eurozone Inflation
Additional volatility is likely in store for the GBP/EUR exchange rate ahead of Friday’s finalised Eurozone consumer price index data for January.
While no change is forecast from the provisional reading, reflecting a slight dip in inflationary pressure on the year, this could still put pressure on the Euro (EUR).
Despite the strength of the currency union’s economic performance the persistent weakness of domestic inflationary pressure limits the scope for any shift in the European Central Bank’s (ECB) policy outlook.
As analysts at BBH noted:
‘Investors are likely to be sensitive to Eurozone inflation data. It is seen as important for the current differences between hawks and doves. That said, there appears to be a consensus currently that accepts a reduction of asset purchases after September, but to conclude at the end of the year. Since the first rate hike (from minus 40 bp deposit rate) will start sometime after the end of purchases, the implication is that pushing the QE to the end of the year means a rate hike likely no sooner than mid-2019.’
Any downside disappointment would give additional fuel to the ECB’s doves, helping to boost the GBP/EUR exchange rate further.
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