Pound-euro exchange rate recovering, as markets bet on Brexit breakthrough

SPECULATION over Brexit continued to drive pound volatility, with officials struggling to make progress towards a final deal, just weeks before the deadline.

As February’s US labour market data significantly undershot expectations, with just 20,000 new jobs added to the economy, this helped to shore up the GBP/USD exchange rate.

The increasingly dovish outlook of the European Central Bank (ECB) failed to keep the euro on a weaker footing for long, meanwhile, even as the economy continued to demonstrate signs of weakness.

With the Brexit deadline drawing ever closer, markets have continued to lack a sense of clarity over the UK’s future relationship with the EU, and its other trading partners.  After MPs pushed back against the Irish-backstop proposal, talks have failed to show any significant signs of progress.

In spite of this, the odds of a no-deal Brexit have declined, with investors betting that Parliament will vote to extend Article 50, rather than allow the UK to crash out of the EU, without any deal in place. As the UK economy continued to show signs of vulnerability at the start of the year, the upside potential of GBP exchange rates proved limited.

The ECB’s March policy meeting proved rather dovish in nature, leaving the euro on the back foot. After policymakers effectively ruled out the prospect of interest rates rising in 2019, and downgraded their Eurozone growth forecasts, EUR exchange rates slumped sharply.

The mixed nature of February’s US jobs data left the US dollar on a weaker footing, even as wage growth showed fresh signs of acceleration. With the US-China trade dispute showing signs of weighing on economic growth, the Federal Reserve looks set to leave monetary policy on hold, for the time being.

Brexit developments look set to remain the primary influence on GBP exchange rates in the weeks ahead, even if the outcome of the process becomes clearer. Signs of an uptick in January’s UK gross domestic product data could offer the pound a boost, however, if the economy appears to shake off the ongoing sense of political uncertainty.

Any acceleration in the latest UK consumer price index data may also encourage GBP exchange rates to strengthen, in spite of the limited odds of an interest-rate hike.

If the Fed signals a greater sense of confidence at its March policy meeting, this could offer a boost to the US dollar. However, if the US economy shows any fresh signs of slowing, the mood of USD exchange rates could rapidly sour.

March’s raft of Eurozone manufacturing and services PMIs may put pressure on the euro.  Another weak month of economic activity could easily send the single currency into a fresh slump against the pound and US dollar.

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Posted by on Mar 15 2019. Filed under Business & Finance. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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