The GBP/EUR exchange rate skyrocketed this week, in response to comments from German Chancellor Angela Merkel on the prospect of a Brexit deal still being agreed by the end of October.
Brexit Optimism Drive Dramatic Surge in Sterling
The Pound roared higher against the Euro this week, as renewed Brexit optimism helped to clear some of the gloom which has weighed on Sterling sentiment in recent weeks.
This optimism was nowhere to be seen through the first half of the session however, after President of the European Council Donald Tusk firmly rejected a four page letter from Boris Johnson calling for the Irish backstop to be scrapped.
However German Chancellor Angela Merkel struck a far more magnanimous tone after meeting with Johnson in Berlin, suggesting a practical solution to the backstop could be found and that a deal could still be reached by 31st October.
Meanwhile, political turmoil in Italy limited the upside in the Euro throughout the week as Prime Minister Giuseppe Conte resignation deepened the country’s political crisis.
The publication of some upbeat PMI figures from the Eurozone also failed to inspire the single currency this week as persistent weakness in Germany’s manufacturing sector stoke fears the country could still fall into a recession this year.
Slowdown in Eurozone Inflation to Undermine the Euro?
Looking ahead to next week, the publication of the Eurozone’s latest Consumer Price Index (CPI) is likely to be the in the spotlight for EUR investors.
August’s preliminary CPI reading is forecast to show inflation in the Eurozone remained at just 1%, yet another indicator of the bloc’s slowdown.
This will also leave inflation well below the European Central Bank’s (ECB) target rate of 2% and could encourage the bank to revise its inflation targets next month when it announces what is expected to be a substantial stimulus package.
Meanwhile, in the continued absence of any notable UK economic data, Brexit developments are likely to remain the main catalyst of movement in the Pound.
However this could result in Sterling retracing some of its gains next week as markets begin to reflect on the challenges still facing Boris Johnson if he is to pass a Brexit deal.