The pound to euro interbank exchange rate has shifted by almost cents over the course of this week. Sterling has fallen as low as 1.0893 on Sunday 25th, to as high as 1.1085 on Tuesday 27th August on the interbank exchange. This rapid movement reflects the shifting Brexit headlines.
In general, reports this week that PM Johnson intends to suspend Parliament have weakened the pound, while signs that Mrs. Merkel and Mr. Macron are showing flexibility have supported sterling versus the single currency.
This is because, when it looks likelier that the UK will reach a Brexit agreement with the EU, sterling rises. Equally, when the probability seemingly increases that we’ll exit Europe without a deal, the pound tends to fall.
This is because the financial markets believe that, if the UK retains closer economic and political ties to the EU after Brexit, it will benefit Britain’s future growth.
Beyond Brexit, another factor that’s influenced the value of sterling versus the euro this week is Germany’s downbeat economic performance.
To start with, on Monday 26th August, we learnt that Germany’s business climate fell to 94.3 in August; the weakest in seven years, according to the Institute for Economic Research (IFO).
In particular, German businesses feel downbeat, because the USA’s and China’s trade war is weighing on sales. When the world’s two largest economies impose tariffs on each other, this suppresses global demand for goods, including German industrial components and vehicles.
Meanwhile, this Tuesday 27th, it was confirmed that Germany’s Gross Domestic Product (GDP) contracted by -0.1% in Q2, between April and June. If Germany’s economy shrinks again this quarter, the country will technically enter recession.
Meanwhile, in the wider Eurozone, economic releases this week have revealed a cloudy picture. On the bright side, we learnt on Thursday 29th that the Economic Sentiment Indicator in the common currency bloc rose to 103.1 in August, above economists’ predictions for 102.3.
Yet less positively, Services Sentiment fell to 9.3, below July’s figure of 10.6. This suggests that Europe’s service providers, from restaurants to social workers to lawyers, feel gloomier about the outlook.
Looking ahead, Eurozone inflation data for August 2019 will be released on Friday 30th. It’s been forecast that price pressures in the bloc will remain subdued at 1.0%, well below the European Central Bank’s (ECB) target of just slightly below 2.0%. This may further incentivise the ECB to cut interest rates at its meeting next month.
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