The GBP/EUR exchange rate weakened slightly through the week as Brexit uncertainty continued and the Euro benefitted from a weak US Dollar due to the pairing’s negative correlation.
Recovering Brexit Hopes Boost Pound
The Pound (GBP) benefited from renewed Brexit hopes at the start of the week after the UK and EU agreed to work ‘intensively’ to secure a trade deal.
UK economic data was also encouraging, with Monday’s release of the final UK Services PMI for September upwardly revised to show increased growth.
However, the PMI data showed another month of job cuts in the service sector, tempering support for the Pound.
Sterling’s gains were checked further as Brexit uncertainty concerns returned on reports of sticking points in talks hindering the chance of an agreement.
Pound sentiment suffered again at the end of the week as the Bank of England’s (BoE) Governor Andrew Bailey warned the UK economy faces ‘unprecedented uncertainty’ and the risks are ‘very much on the downside’.
Meanwhile, the Euro (EUR) made modest gains on weakness in the US Dollar and a more optimistic market mood.
The Euro’s gains came despite the European Central Bank’s (ECB) President, Christine Lagarde, warning low inflation poses challenges to the ECB and that a second coronavirus wave could hinder the Eurozone’s economic recovery.
Eurozone economic data continued to post encouraging gains, however, with Germany’s Factory Orders and Eurozone and German PMIs beating forecasts.
At the same time, the US Dollar (USD) fluctuated last week following US President Donald Trump’s swift recovery from Covid-19 and then halting talks over the US coronavirus stimulus package.
However, Trump remains open to some fiscal stimulus which lifted market sentiment and hopes stimulus can be agreed, in turn weighing on safe-haven USD.
GBP Volatility Ahead
Pound exchange rates could become more volatile next week as a self-imposed Brexit deadline looms, although strong upside potential remains if an agreement is reached.
UK economic data will also be in focus, with Tuesday’s unemployment rate release for August providing a snapshot of Britain’s joblessness situation.
If this fuels fears of soaring levels of unemployment to come, then Sterling could come under pressure.
Euro investors will be paying close attention to German and the Eurozone’s inflation data next week as confirmation of negative readings will increase the pressure on the ECB to act.
Meanwhile, US Dollar (USD) investors will be keeping a close eye on American political developments. Fresh volatility is likely to follow increased US political uncertainty as US stimulus remains unresolved and the presidential election draws nearer.
