Disappointing German industrial production figures were not enough to shore up the Pound Sterling Euro (GBP/EUR) exchange rate on Tuesday.
While the Eurozone’s powerhouse economy continued to demonstrate signs of weakness the Euro remained on a generally stronger footing against its rivals.
Even though German export volumes stagnated on the month in June this bettered forecasts for a -0.4% contraction, giving investors some cause for confidence.
As the German trade surplus also widened further than expected this helped to encourage the single currency to push higher across the board, in spite of lingering doubts over the economic outlook.
Brexit Uncertainty Continues to Dominate Pound Exchange Rate Outlook
Confidence in the Pound remained muted on Tuesday, with markets still concerned by the rising odds of the UK and EU failing to agree a Brexit deal.
This sense of uncertainty has kept the GBP/EUR exchange rate in a slump, even as the Halifax house price index bettered forecast.
Although prices unexpectedly strengthened 1.4% on the month in July this failed to offer any significant support to the Pound.
Political jitters are likely to dominate the outlook of GBP exchange rates for some time to come, especially if there are no signs of the two side progressing towards an agreement.
Jane Foley, Senior FX Strategist at Rabobank, commented:
‘It remains our central view that a trade deal between the EU and the UK will be done in time to avert a hard Brexit in March 2019. However, as time begins to run short, it is understandable that the market is becoming nervous. Unless signs that progress on a trade deal begin to solidify, GBP stands to continue losing ground.
‘Last Friday BoE Governor Carney referred to the chances of a hard Brexit as being “uncomfortably high”. Over the weekend trade Minister Fox assigned a 60% probably of such an outcome. Fox’s remarks ensured a higher open for EUR/GBP at the start of this week, though in fairness the pound had very quickly given back the gains made immediately after the announcement of a 25 bps BoE rate hike last week.
‘It has been our view for some time that a Brexit deal is likely to be of the last minute variety. As a consequence, we have expected for a while that EUR/GBP will be trading close to the 0.89 area in H2 this year. Although the pound may be a little distracted by key economic data in the coming months, politics is set to remain the central focus.’
Even so, if the RICS house price balance improves as forecast on Wednesday night this could encourage the Pound to recover some ground.
Evidence of greater resilience within the UK housing market may help to limit the weakness of the GBP/EUR exchange rate.
Pound Euro Exchange Rate Volatility Forecast on ECB Economic Bulletin
Further volatility is likely in store for the Euro, meanwhile, as a result of the European Central Bank (ECB) Economic Bulletin for July.
If the report indicates a greater level of optimism within the central bank this could encourage the single currency to make fresh gains on Thursday.
However, if the Bulletin reinforces the view that the ECB is likely to leave interest rates on hold for many months to come this may leave EUR exchange rates vulnerable to weakness.
As long as signs continue to point towards the Eurozone economy struggling to regain the momentum lost at the start of the year the upside potential of the Euro remains limited.
Increasing global trade worries could also prompt movement for the GBP/EUR exchange rate, especially if tensions between the US and EU show any fresh signs of picking up.
With fresh Eurozone data lacking over the remainder of the week the Euro may struggle to hold onto its recent gains against the Pound.
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TAGS: Pound Euro Forecasts