EUR to GBP Exchange Rate Steadies Ahead of Anticipated Brexit Developments

September 17, 2018 – Written by Toni Johnson

The Pound saw sturdy performance on Monday, as it continued to find support in last week’s Brexit developments and as investors anticipated further Brexit comments this week. This meant the Euro to British Pound (EUR/GBP) exchange rate was unable to recover any of last week’s losses and instead saw tight movement.

Last week saw EUR/GBP tumble around half a penny, from 0.8945 to 0.8898. On Monday, EUR/GBP trended generally closely to the week’s opening levels but did briefly touch a monthly low of 0.8886. EUR/GBP may remain relatively flat until key Eurozone or Brexit news later in the week.

EUR Avoids Losses with Eurozone Inflation on Track

Last week, the European Central Bank (ECB) held its September monetary policy decision. While the bank left monetary policy frozen as expected and even cut the Eurozone’s growth forecasts due to US-EU trade tensions, Euro investors were still happy with the bank’s news.

Perhaps most notably, the ECB expressed confidence in its inflation outlook despite the US-EU trade uncertainties and left its inflation forecasts untouched.

This, as well as the bank’s plans to start withdrawing its quantitative easing (QE) scheme in October, left investors confident that the European Central Bank’s (ECB) monetary policy outlook had not been notably negatively influenced by trade jitters.

The ECB’s inflation outlook was supported on Monday, as the Eurozone’s final August Consumer Price Index (CPI) inflation rate report was published.

As was projected, the yearly inflation rate slowed from 2.1% to 2.0% and the core yearly inflation rate from 1.1% to 1.0%.

The monthly inflation rate met forecasts too, rising from -0.3% to 0.2%.

Analysts were generally optimistic about the inflation outlook for the Eurozone, which kept the Euro supported on Monday. According to Anders Svendsen, Research Analyst at Nordea Markets:

‘We expect that core inflation will accelerate gradually in 2019-2020 (our forecast). The main contributor to the future inflation will be higher labour costs.

In the second quarter or 2018, labour compensation was up 2.3% y/y – the fastest pace since 2008. Although a part of the acceleration is due to temporary factors such as higher public sector wages in Italy, it is noteworthy that wage increases are becoming larger in most Euro-area countries.

Thus, it seems that the tightening of labour market is now taking wages higher and while a part of the increases can be compensated by productivity increases, we expect them to feed also core inflation.’

GBP Supported by Brexit Hopes

Since last week, the Pound has been supported above its worst levels as fears about the possibility of a worst-case scenario ‘no-deal Brexit’ have notably lightened.

Negotiators from both the UK and EU have indicated that they would rather avoid a ‘no-deal Brexit’, and have also expressed confidence in recent progress in negotiations.

Most notably, Pound investors have been more bullish in reaction to recent comments from EU Chief Negotiator Michel Barnier.

Barnier has shown confidence that a UK-EU Brexit deal can be reached by November.

As Barnier has been more firm in the past, analysts are hoping he may be willing to take a more flexible stance in talks.

This speculation has ultimately made Pound investors more confident that a ‘no-deal Brexit’ can be avoided.

On Monday, the Pound remained steady thanks to last week’s comments from Barnier, as well as market anticipation for potential Brexit developments at this week’s EU summit.

EUR/GBP Forecast: ECB Speculation and Brexit Developments in Focus

While the week’s most notable Eurozone ecostats won’t be published until later in the week, the Euro could still be influenced by potential comments from European Central Bank (ECB) President Mario Draghi in the coming days.

Draghi will hold a speech on Tuesday, and another on Wednesday. If any of his comments surprise investors it could inspire movement in the Euro.

In particular, investors will be anxious to see further comments from Draghi regarding US-EU trade tensions, and the Eurozone’s inflation outlook.

The Pound, though, could be even more influential to the Euro to Pound exchange rate’s movement in the coming sessions, especially if there are any noteworthy developments in Brexit negotiations.

No notable UK data will be published on Tuesday, but Wednesday will see the publication of Britain’s August Consumer Price Index (CPI) inflation rate report, with UK retail sales coming on Thursday.

The biggest event this week for the Pound, however, will be the EU summit on Thursday where there could be notable developments in UK-EU Brexit negotiations.

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TAGS: Euro Pound Forecasts