GBP to EUR Exchange Rate Stumbles from Near Weekly Highs on Bank of England Rate Cut Speculation

January 9, 2020 – Written by Frank Davies

Despite yesterday’s cooler Pound movement, the British Pound to Euro (GBP/EUR) exchange rate continued to trend closely to its best levels until this morning, when a combination of stronger Eurozone data and lingering Brexit uncertainty knocked the pair slightly. The Brexit process is going smoothly this month, but uncertainty over how things will develop throughout 2020 is lingering in the background and keeping pressure on the Pound outlook.

Since opening this week at the level 1.1712, GBP/EUR has been trending with an upside bias as data and Brexit speculation supports Sterling, while the Euro has been weighed by strength in rivals.

Yesterday, GBP/EUR touched on a high of 1.1823, the pair’s best level in over a week. Since then though, GBP/EUR movement has steadied slightly and the pair is slipping again today.

At the time of writing on Thursday, GBP/EUR is trending near the level of 1.1765 as the Pound slides back amid Brexit jitters and comments from the Bank of England’s (BoE) Mark Carney.

GBP Exchange Rates Tumble amid Brexit and Bank of England (BoE) Speculation

For much of the week so far, the Pound had seen relatively resilient performance as the British currency benefitted from signs of stronger UK economic performance, combined with hopes that the Brexit process would proceed smoothly going forwards.

However, Brexit uncertainties rose again yesterday. European Commission President Ursula von der Leyen said it would be ‘impossible’ to agree a full Brexit deal with the UK government’s short transition period timeframe.

Yet, the government continues to insist it will not allow an extension to the Brexit transition period. This worsened concerns about the coming year of UK-EU Brexit negotiations.

However, the biggest cause of the Pound’s drop today was fresh comments from Bank of England (BoE) Governor Mark Carney.

In an unexpected shift in tone from the bank’s mixed but optimistic stance in its last policy decision, Carney surprised investors with more dovish signals in this morning’s speech.

Reflecting the split in policymakers and the potential for further uncertainties dampening Britain’s economic performance, Carney said:

‘On the one hand, there is a modest but rising degree of spare capacity in the UK and core inflation remains subdued. There are downside risks from global growth and the possibility that uncertainties over future trading relationships could remain entrenched. With the relatively limited space to cut Bank Rate, if evidence builds that the weakness in activity could persist, risk management considerations would favour a relatively prompt response.’

His comments led to notable Pound losses at the time of writing on Thursday morning.

EUR Exchange Rates Find Support in German Production Stats

Investors have been hesitant to buy the Euro in recent sessions, due to strength in rival currencies like the Pound and US Dollar (USD), as well as a lack of particularly impressive Eurozone ecostats.

While Monday’s German retail and services stats beat forecasts, yesterday’s German factory orders results from November showed a surprising contraction.

Factory orders contracted at -1.3% rather than improving to growth of 0.3% as expected. On top of this, French consumer confidence and Eurozone business confidence fell short of forecasts.

As a result of yesterday’s mixed data, today’s stronger than expected German industrial production results were something of a relief for Euro investors.

German industrial production rose from -1.0% to 1.1% in November, notably above the expected rise of 0.7%. It boosted hopes that Germany’s factory sector was showing signs of recovery after a dire performance in 2019.

However, market demand for the Euro was ultimately still limited and GBP/EUR losses were driven more by weakness in the Pound. Today’s German exports data was disappointing and the Eurozone’s unemployment rate met forecasts by remaining at 7.5%.

GBP/EUR Exchange Rate Forecast: Brexit and Bank of England Jitters Could Keep the Pressure Up

The Pound’s recent strength has been due to hopes that the UK economic outlook is improving, or the Brexit process will go more smoothly in 2020.

However, if the economy is not resilient enough amid Brexit uncertainty to prevent an interest rate cut from the Bank of England (BoE), investors will have little reason to be optimistic on the Pound outlook.

For now, Bank of England interest rate cut speculation and Brexit uncertainties are weighing heavily on the Pound and are likely to limit GBP/EUR’s potential for gains in the coming sessions.

However, if Euro strength remains limited the pair is unlikely to fall much lower either.

French industrial production data could offer the Euro some support tomorrow if it beats forecasts, but that aside the shared currency will continue to be driven by strength in rivals like the Pound and US Dollar (USD).

Next week, Pound to Euro exchange rate investors will be anticipating UK and German growth rate stats, as well as UK and Eurozone inflation results that could further influence central bank speculation.

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TAGS: Pound Euro Forecasts