Confidence in the Pound continued to pick back up at the start of the week, with markets reassured by the signs of some forward progress in the Brexit negotiations.
While the actual start of the second phase of talks is yet to be agreed the suggestion that EU leaders will begin to discuss a future trade deal amongst themselves gave investors cause for confidence.
Even so, GBP exchange rates remain vulnerable to downside pressure if there are any signs that the first phase of talks is likely to drag on into 2018 without any significant progress towards an agreement.
Further volatility for the Pound is likely in response to the third quarter UK gross domestic product report, which may undermine confidence in the domestic outlook.
Unless growth shows further signs of acceleration, on the quarter at least, then the Pound Euro exchange rate is likely to return to a weaker footing.
Any indications that the UK economy is losing momentum could dissuade the Bank of England (BoE) from pursuing an imminent interest rate hike, diminishing the odds of any November action.
This could weigh heavily on Sterling, especially as a number of Monetary Policy Committee (MPC) members have already expressed some misgivings over the wisdom of raising interest rates at this juncture.
However, if GDP continued to hold up in spite of Brexit-based uncertainty and a weaker Pound then the GBP EUR exchange rate may find fresh support on Wednesday.
Euro Set to Remain Bearish Ahead of ECB Announcement
The Catalan crisis continued to hang over the Euro, meanwhile, after the Spanish government invoked article 155 of the constitution in order to impose direct rule on the region.
With Catalan officials reportedly weighing up the prospect of making a unilateral declaration of independence in response the situation is still far from over.
If tensions escalate further then the mood towards the single currency is likely to sour even more, with markets wary of any further disruption within the Eurozone.
EUR exchange rates could also come under pressure in the coming days as anticipation mounts for the October European Central Bank (ECB) policy decision.
Investors are generally braced for the central bank to finally announce that it is beginning to taper its quantitative easing program at long last.
As analysts at BNP Paribas noted:
‘With recent reports suggesting that a 9-month extension was under discussion, a result in line with our expectation might be viewed as marginally hawkish. However, we see limited scope for the EUR to benefit from the announcement given the extent to which tapering of purchases has already been priced in.’
However, if ECB President Mario Draghi maintains a relatively dovish tone, regardless of any monetary policy action, then the GBP EUR exchange rate could hold onto some of its recent gains.
Current GBP EUR Interbank Exchange Rates
At the time of writing, the Pound Euro exchange rate was making solid gains in the region of 1.1216. Meanwhile, the Euro Pound exchange rate was trending lower around 0.8914.
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