Pound Resumes Lead against Euro (GBP EUR) on Upbeat UK Construction Outlook
The Pound Euro (GBP/EUR) exchange rate hit the ground running on Monday, bolstered by an upbeat outlook for 2018 from British manufacturers.
According to a poll by the EEF and the insurance firm AIG, 40% of UK companies questioned were planning for growth in 2018, whilst only 19% were expecting a downturn.
This outlook resulted from the expectation that strengthening export markets will help sustain order books, with the confident mood in boardrooms reflecting improvements in sales to UK customers, exports, job numbers and ultimately profit margins.
EEF Chief Executive Stephen Phipson discussed the survey’s findings, stating:
‘Manufacturers left 2017 in an upbeat mood and are set to outpace the rest of the economy again this year as the growth in global trade continues to gain momentum. That is not to say everything in the 2018 garden is rosy, however, as there are plenty of factors that could puncture this positive picture’.
These ‘factors’ that Phipson notes relate to Brexit uncertainties, with businesses still unsure of exactly what to expect for the UK’s future relationship with the EU following the split.
This largely transmits to a lack of business investment, with many companies hesitant to invest too heavily in things like recruitment and property until greater clarity is available.
Euro (EUR) Exchange Rate Outlook Hampered by Ongoing Political Unrest
Germany’s Chancellor Angela Merkel has entered pivotal talks with the Social Democratic Party (SPD), led by Martin Schulz, in a desperate bid to renew a governing coalition that ended in tumult.
The SPD previously refused to enter into another coalition with Merkel’s Christian Democratic Union (CDU) after the recent election saw them punished for their alliance.
Nevertheless, with Germany lacking a formal government, Schulz has tentatively agreed to enter coalition talks once more, this time vowing to extract significant concessions from Merkel’s camp.
These talks are set to run until Thursday and markets are not expecting them to be stable, with Merkel’s conservatives being at odds with the left-wing SPD over a huge number of issues, including welfare reforms and refugee status.
Oliver Rakau, Chief German Economist at Oxford Economics, shared a gloomy outlook on the proceedings, stating:
‘The government formatting in Germany is unlikely to be completed before the end of the first quarter even in an optimistic scenario. The main stumbling blocks are the final vote of the SPD party congress. The latter is extremely sceptical of a new cooperation with the CDU’.
If said talks fail then another election will most likely occur, an eventuality that would be a significant blow to Germany and indeed the bloc itself. This would, in turn, have dire consequences for the Euro (EUR).
On the other hand, any progress in talks will be greeted positively and is liable to put the GBP EUR exchange rate under renewed pressure.
GBP EUR Exchange Rate Volatility Likely on UK GDP and Cabinet Reshuffle
The Pound Euro exchange rate could grow increasingly volatile as the week progresses depending on the result of Wednesday’s November trade balance readings and the NIESR gross domestic product estimate for December.
GDP forecasts currently point towards growth in the fourth quarter of 2017 holding steady at 0.5% over the last three months, essentially suggesting that the UK continues to prove resilient to the ongoing uncertainty regarding Brexit.
A drop could promptly squash this optimism, however.
In other news, today’s cabinet reshuffle by UK Prime Minister Theresa May could potentially have an impact on the Pound, though with most of the senior ministers staying in position it is far more likely that comments on Brexit progress (or a lack thereof) will be the driving force behind any volatility.
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