Despite broad market negativity on the Pound amid concerns that the UK is headed towards a worst-case scenario ‘no-deal Brexit’, the British Pound to Euro (GBP/EUR) exchange rate rebounded from its cheapest levels on Wednesday. Meanwhile, the Euro’s strength was limited by signs of weakness in Eurozone growth.
Due to Tuesday’s plunge and Wednesday’s recovery, GBP/EUR has seen fairly wide fluctuations since opening this week at the level of 1.1243. On Tuesday evening, GBP/EUR briefly hit a one month low of 1.1191, before recovering to near the level of 1.1275 at the time of writing on Wednesday afternoon.
GBP Rebounds from Cheapest Levels despite Brexit Fears
Following the Pound’s Tuesday selloff, investors opted to buy the embattled British currency back from its lows on Wednesday despite a lack of fresh support or reasons to buy the currency.
Investors bought Sterling from its cheapest levels in profit-taking moves, ahead of Thursday’s Bank of England (BoE) decision. This was despite expectations that the BoE would not be able to offer much in the way of support itself.
Some analysts and investors speculate that the BoE could continue to signal plans for normalising UK monetary policy, despite the broad uncertainties of the Brexit process.
According to Neil Mellor, senior currency strategist at BNY Mellon:
‘The BoE might well convey a surprisingly stoical position,
The bank appears intent upon managing growth in accordance with an economy subject to increased capacity constraints in an ageing cycle,’
Essentially, investors bought the cheap Pound amid speculation that the BoE could be more hawkish than previously expected. Much of the Pound’s recent weakness was due to ‘no-deal Brexit’ fears rather than new developments.
Investors also bought Sterling on Wednesday in reaction to comments from UK Brexit Minister Dominic Raab, who said he expected a UK-EU Brexit deal would be finalised by the 21st of November.
However, many analysts still believe that the Pound’s potential for gains are likely to be limited without any actual Brexit developments, even if the Bank of England is surprisingly hawkish.
According to Brian Martin, Senior International Economist at ANZ Bank in London:
‘Brexit agreement over safeguarding against a hard border for Northern Ireland is proving elusive. It is impossible to see how, without that, a Withdrawal Agreement will be reached. For businesses, the longer the delay, the greater the uncertainty,’
On top of Brexit uncertainties, the Pound’s strength has been limited by mixed UK ecostats. Tuesday’s CBI distributive trades data fell to just 5, while Gfk’s UK consumer confidence report worsened from -9 to -10 as expected.
EUR Unappealing as Eurozone Data Continues to Print Mixed
Wednesday’s most influential Eurozone data was generally optimistic, but as this week’s other data has disappointed and investors remain anxious about tensions between Italy and the EU, the Euro failed to capitalise.
October’s Eurozone Consumer Price Index (CPI) projection rose from 2.1% to 2.2% year-on-year as forecast.
Notably though, the core inflation rate unexpectedly climbed from 0.9% to 1.1%, beating the expected 1.0%.
This indicated that the Eurozone was seeing more sustained price pressure, in news that could offer the European Central Bank (ECB) some relief.
However, despite the rising Eurozone inflation investors were disappointed with Germany’s September retail sales results, which fell well short of forecasts. Lasting disappointment with the Eurozone’s growth rate projections also weighed on the Euro.
GBP/EUR Forecast: Bank of England (BoE) Decision Unlikely to Cause Major Movement
Thursday will see the Bank of England (BoE) hold its November monetary policy decision.
Typically a highly influential event, Thursday’s BoE decision may be brushed over in favour of Brexit uncertainties if the BoE makes no noteworthy announcements.
Some analysts speculate that the bank could be more hawkish than expected about the monetary policy outlook.
This may offer the Pound some fresh support, but potential Sterling gains are likely to be limited as investors focus on Brexit developments instead.
As for the Euro, a lack of notable Eurozone data due for publication throughout the day means that Euro investors are more likely to react to the strength of the Euro’s rivals, or await Friday’s Eurozone manufacturing PMI data.
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TAGS: Pound Euro Forecasts