Pound to Euro Exchange Rate Jumps on Monday in Anticipation for Brexit Developments
Market expectations that the UK and EU would finally be able to agree to a post-Brexit transitional period deal in the coming week’s EU summit left the Pound to Euro (GBP/EUR) exchange rate stronger on Monday.
European Central Bank (ECB) dovishness drove GBP/EUR last week and helped the pair advance slightly, from the week’s opening levels of 1.1254 to 1.1341. On Monday morning, GBP/EUR jumped and hit its best level since January, 1.1414.
The primary reason for Sterling (GBP) gains on Monday morning was confidence that the UK government will succeed in securing a Brexit transition deal at the EU summit from the 22nd to the 23rd of March.
A transitional period would essentially give Britain another two years of largely EU rules, to help the nation to transition smoothly into EU-less life. Concerns that a transition deal may not be reached at all has kept pressure on Sterling over the past month.
According to Alvin Tan, FX strategist from Societe Generale;
‘There is a lot of optimism about the transition deal. The market thinks it’s a done deal and the general expectation is that a deal is going to be contingent on the Irish border issue,’
Essentially, the Pound is up on market anticipation that there will be a major Brexit breakthrough after weeks of deadlock and uncertainty.
European Central Bank (ECB) Dovishness Pressures Euro (EUR) Exchange Rates
Investors have had little reason to buy the Euro (EUR) over the past week, as the increasingly strong Eurozone economic outlook does not seem to have led to a more hawkish monetary policy outlook from the European Central Bank (ECB).
Since the ECB’s March policy decision, bank officials have held speeches asserting an overall cautious and dovish stance.
Top ranking bank officials including President Mario Draghi and Chief Economist Peter Praet have remained concerned that Eurozone inflation could remain subdued for an extended period of time.
Draghi has indicated that the bank could continue its bond-buying scheme until Eurozone inflation sees more sustained strength.
On top of ECB dovishness, the Euro has also been pressured by underwhelming Eurozone ecostats.
The Eurozone’s final February Consumer Price Index (CPI) results fell short of expectations year-on-year, coming in at 1.1% rather than the forecast 1.2%.
Monday’s Eurozone data has done little to boost market demand for the shared currency either. While Eurozone construction output improved in January, Italy’s January industrial production unexpectedly contracted at -1.9% year-on-year.
Pound to Euro (GBP/EUR) Forecast: Outlook Could Surge if Brexit Transition is Agreed
Sterling drove GBP/EUR movement on Monday and this is likely to continue for most of the week, as anticipated Brexit developments would influence the Pound outlook in the short term to the long term.
The EU summit from the 22nd to the 23rd is likely to be the primary cause of GBP/EUR movement. If a post-Brexit transition period is agreed, the Pound is likely to see broadly stronger performance.
A transition would give markets reassurance that UK businesses will not experience a ‘cliff-edge’ scenario hard Brexit in March 2019, and would give them more time to prepare for business outside of the EU. It would make Sterling more appealing in the long-term.
However, anticipation for the event is so strong because there is still a chance that a deal may not be reached, due to a deadlock of disagreements over issues regarding the Irish border.
If the deal falls through or is delayed, GBP/EUR is likely to slump and shed much of its recent gains.
Other major UK news could also influence the Pound outlook in the coming sessions, including inflation, wage growth and retail data, as well as of course the March Bank of England (BoE) policy decision.
Sterling’s reaction to these results could be limited though, at least until markets have more reassurance over the UK-EU transition period.
Eurozone confidence stats and PMIs could influence the Euro outlook in the coming days, but overall the Pound to Euro (GBP/EUR) exchange rate will be driven by Sterling.
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