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Sterling/Euro Exchange Rate Review Feb 2019

Thursday 07 March 2019

While the first half of February saw the Pound to Euro exchange rate trend largely sideways, the second half saw Sterling climb against the common currency to reside near two-year highs, writes Ben Scott of Global Reach.

UK data disappoints, but Brexit causes GBP gains

Economic data at the start of the month didn’t bode well for Sterling, and a larger-than-forecast decline in UK construction productivity took place, attributed to Brexit uncertainty.

Many pieces of economic data have noted a downturn due to Brexit, and with so many questions left unanswered, Sterling has been particularly volatile.

However, by February 12th, the Pound to Euro exchange rate was experiencing swings British politics took the driver’s seat once again.

The Pound felt some buoyancy on news that Article 50 could be extended, as well as gaining on upbeat comments from Bank of England (BoE) Governor Mark Carney.

The Pound also enjoyed gains on news that Chief Brexit negotiator Ollie Robbins had been overheard discussing Theresa May’s tactics to avoid a no-deal Brexit.

In less positive news, UK inflation fell, contracting by -0.8% in January, below the -0.7% forecast and previous +0.2% print. On the year, the UK Consumer Price Index slipped from 2.1% to 1.8%, registering a two-year low.

Industry expert Nancy Curtin suggests: ‘The sluggish UK economy is symptomatic of the wider picture. Central banks across the globe have taken their foot off the stimulus pedal and we are now seeing the results. With idiosyncratic issues in both the US and Europe slowing growth, Brexit affecting the UK, trade disputes, and a Chinese slowdown, we’re indisputably in a mid-cycle slowdown.’

By February 14th, the Pound was softening against the Euro as Brexit concerns pressured the British currency lower across the board. Sterling softness came after news that remain-supporting MPs would likely rebel against Theresa May’s amendments.

As markets entered late February, the 20th saw the Pound to Euro (GBP/EUR) exchange rate close above 1.15, the highest level so far in the month.

While news broke that Tory MPs were resigning, the Pound remained rather resilient as it was expected these political developments would put pressure on the UK government to fight for a softer Brexit.

European data provides further evidence of slowdown

Meanwhile, economic data in the Eurozone was also disappointing. Manufacturing took a sharp decline which increased fears that the European Central Bank (ECB) may have to look at introducing further stimulus measures, after just wrapping up its extensive quantitative easing programme. Germany’s economy narrowly avoided recession, and the manufacturing sector fell further into recession in February, despite expectations for a more positive reading. The Eurozone Manufacturing PMI as a whole dropped into contraction for the first time in five years in February, at 49.2 from 50.5—any reading above 50.0 denotes expansion.

By the end of the month, the Pound had reached seven-month highs against the US Dollar, and two-year highs versus the Euro.

Despite Theresa May delaying the meaningful vote on the final Brexit deal, the prospect of an ebbing no-deal Brexit allowed Sterling to gain.

On the 26th February, the Pound climbed by around 1.0% against a host of currency majors after Theresa May made three commitments. A meaningful vote will be held by the 12th of March. If no deal is in place by that point, MPs will be able to vote on the 13th of March on whether to leave with no-deal. If a no-deal Brexit is rejected, there will be another opportunity for MPs to vote on 14th March, as to whether to extend Article 50.

GBP/EUR Forecast

The Euro exchange rate might feel the heat in the coming months if the European Central Bank chooses to implement new stimulus measures. The central bank may have no choice but to try and buoy economic growth in the currency bloc if data keeps disappointing.

While a new round of stimulus would likely bode badly for the Euro, exports from the Eurozone may stand to benefit. If ongoing trade disputes between the US and China continue, the Eurozone could note an increase of goods leaving the bloc which may prove to be supportive for the currency. Thursday 7th will see the ECB make its latest monetary policy decision, and comments by central bank Chief Mario Draghi will likely be under heavy scrutiny.

Meanwhile, the upcoming Brexit events will likely be very influential for Sterling. While the beginning of March has already seen some disappointing UK economic data emerge, Brexit has been blamed for a lot of adverse ecostats.

Therefore, decisions in the UK’s future are likely to become increasingly important, especially as Britain hurtles towards the March 29th Brexit day deadline.

Ben Scott
Global Reach

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