Will GBP / EUR buyers see the 1.17 return?
The exchange rate of the British pound against the euro (GBP / EUR) rebounded at the weekend after Brexit tensions caused the collapse of the British pound.
Despite a deadlock over the Northern Ireland protocol sparking a war of words between the UK and the EU, the pound mounted a surprise rally on the back of the conciliatory remarks of the European Central Bank (ECB).
British Pound (GBP) exchange rates rebound from Brexit lows
The British pound (GBP) initially stumbled earlier in the week, following comments from Health Secretary Matt Hancock, who said he was “absolutely open” to delaying the lifting of the remaining lockdown restrictions on the 21st. June.
The British pound recovered without a clear catalyst, but Brexit and coronavirus concerns weighed on the currency as the week progressed, pushing GBP / EUR rates lower.
The pound found modest support after the Bank of England (BoE) Chief Economist Andy Haldane suggested the UK “maybe should start turning off the stimulus tap”.
However, tensions between the UK and the EU over the Northern Ireland protocol peaked following a stalemate in crisis talks on Wednesday, causing the pound to fall against the euro. (EUR) from € 1.1639 to € 1.1577. European Commission Vice-President Maroš Šefčovič has warned that the EU will act “quickly, firmly and decisively” if the UK flouts the current deal.
Despite this, the pound made a surprise rally on Thursday afternoon and continued to climb until Friday, perhaps supported by slowing demand for both the euro and the US dollar (USD).
Euro (EUR) exchange rates slide on ECB Dovish remarks
Euro exchange rates fell on Monday following disappointing data from Germany, as orders for German factories unexpectedly fell 0.2%.
The single currency regained some losses on a weaker US dollar before finding support in the euro area GDP growth estimate for the first quarter of this year, which was revised upwards, although these gains were somewhat limited by the ZEW Economic Sentiment Index in Germany which turned out below expectations. .
On Wednesday, the euro climbed amid reopening optimism, the bloc’s vaccination program accelerating and France and Belgium entering their next steps to ease restrictions.
However, the euro’s x rates fell following the ECB’s decision on interest rates as the bank chose to keep rates at an all time high. While expected, comments from ECB President Christine Lagarde saying it was “too early” to discuss reducing bond purchases still dealt a blow to the single currency.
The German Bundesbank’s half-yearly forecast on Friday failed to support the euro, despite its optimistic tone, with German economic growth expected to hit 3.7% this year and 5.3% in 2022.
Short term GBP / EUR forecast: potential for volatility amid important data releases
This week could see more volatility in the British pound (GBP / EUR) exchange rate, with positive data releases expected from both the UK and the Eurozone.
On Monday, the euro zone is due to publish its industrial production figures, with industrial production expected to have increased in April. If the data meets expectations, it could boost the euro.
The UK claim count on Tuesday is the next big release and could support the British pound. The number of people claiming unemployment benefits is expected to drop by 62,000, which would suggest a further recovery in the UK labor market.
The pound could find further support on Wednesday with figures for the UK inflation rate, which economists expect to show the UK economy continued to grow last month. Month-on-month inflation is expected to moderate slightly from 0.6% in April to 0.3% in May, while the year-on-year figures are expected to rise from 0.3% to 1.8%.
Also on Wednesday, the US Federal Reserve interest rate decision may affect GBP / EUR exchange rates, as any hint of a more hawkish stance by the Fed could stimulate demand for USD, thus lowering the EUR through the pair’s negative correlation.
Towards the end of the week, Eurozone inflation data could support the euro, as inflation is expected to have risen last month by 0.3% mo and 2% yoy.
Finally, UK retail sales figures on Friday are expected to show a 4.5% increase in retail sales in May. While this figure is lower than April’s 9.2% rise, it would still show strong growth in consumer activity and could see the pound end the week on a high.
Meanwhile, Brexit-related tensions and coronavirus uncertainty are unlikely to subside, so any further development could increase the volatility of the sterling’s exchange rate against the euro.