Hopes that the European Central Bank (ECB) are still planning to withdraw its quantitative easing (QE) scheme despite Eurozone economic slowdown and recent political jitters have left the shared currency much stronger this week, helping it to easily push the British Pound to Euro (GBP/EUR) exchange rate lower.
After climbing from 1.1410 to 1.1443 on Eurozone political jitters last week, GBP/EUR has tumbled this week. On Thursday morning, GBP/EUR trended near a weekly low of 1.1359 as investors bought the Euro back and the Pound was weakened by Brexit uncertainties.
Despite Markit publishing a hat trick of better than expected UK PMI reports from May and indicating that Britain’s economy was rebounding from the weakness it saw in Q1, the Pound has struggled to hold its ground due to persistent Brexit uncertainties.
Brexit news has hit headlines again this week, as concerns rise that the UK government’s plans for a backstop option regarding UK membership in the EU customs union has caused a fissure among government officials.
On Thursday, reports emerged that UK Brexit Secretary David Davis would consider resigning if UK Prime Minister Theresa May published the backstop plan.
The plan is controversial among hard Brexit supporters in government, as it would mean Britain remains in an EU customs union post-Brexit in order to keep a soft border between Northern Ireland and the Republic of Ireland.
Sterling saw a brief boost in demand earlier in the week on hopes that Britain’s economy would recover, and due to economists predicting that Britain’s split from the EU would ultimately be amicable.
However, analysts remain doubtful that the Pound’s recovery will be significant in the mid-term, as Brexit uncertainties may continue to overshadow any potential recovery in Britain’s economic performance.
Since Wednesday, demand for the Euro has improved thanks to comments from European Central Bank (ECB) Chief Economist Peter Praet. The comments were perceived to be hawkish, a relief following the uncertainty of recent Eurozone economic and political concerns.
Praet noted that the bank was becoming increasingly confident that Eurozone inflation could reach bank targets, and indicated that the bank would soon discuss the withdrawal of its aggressive quantitative easing (QE) program.
Unless there is a late week surprise regarding Brexit or central bank speculation, the Pound to Euro exchange rate is on track to end the week lower.
Next week, the European Central Bank (ECB) will hold its June policy decision. If the bank shows further optimism on the Eurozone’s economy despite recent political jitters, the Pound to Euro exchange rate may see another week of losses.
Other major UK and Eurozone data will be published throughout the week too, including UK inflation and job market results, as well as Eurozone employment and inflation data which could drive GBP/EUR movement.