GBPEUR exchange rates remain vulnerable but problems within the Eurozone are taking centre stage once again.

Euro before unemployment and inflation data

EU unemployment data is released this morning where expectation is for a small improvement from 10.1% to 10% for the month of August. EU Consumer Price Index inflation numbers are also released and this in my view is the one to watch. Any weakening in inflation would be most unwelcome for the European Central Bank which has been trying to stave off persistent weak growth and low inflation for years.

Despite growing pressure at the last European Central Bank (ECB) meeting to do more, the central bank held off from extending its Quantitative Easing programme which it was widely tipped to extend by six months. Any deterioration in the numbers will surely reignite the debate for an extension of QE and the Euro could weaken on the expectation the ECB will need to act at the next meeting.

On the political front there are so many issues coming to the boil. The Italian government has confirmed that the referendum on constitutional reform will be held on the 4th December 2016 so this date should be marked in the calendar. The vote could go either way. The problems with Deutsche Bank are not going away anytime soon. German Chancellor Angela Merkel has stated there will be no state help for the bank although it is hard to imagine that Germany would allow the bank to fail. A bail out by the German government seems the likely outcome and with this would come additional political pressures ahead of the German election next year.

Euro and politics, Brexit related

German politician Wolfgang Schaeuble has offered to translate the EU Lisbon treaty into English and send it to Britain highlighting the four freedoms. This is all of course based on the assumption that Britain wishes to remain a member of the single market and this in turn raises the question of membership of the single market as opposed to access to it. A hard Brexit, withdrawing from the single market in my view looks like where Britain is heading. Even on the continent the head of Germany’s main business group, Markus Kerber of the BDI, (the equivalent to the Confederation of British Industry) has publicly stated that he thinks it would be a better “to have a hard Brexit that works rather than a fudge in the middle.”

Sterling is down almost 10% against the Euro since the referendum vote but Brexit still hasn’t actually happened. Whilst rates for GBP EUR remain lower in this period of limbo they may have further to fall as developments unfold in the run up to when Article 50 is invoked, a date that is still unknown.

Meanwhile in this game of poker between Britain and Europe, the EU is currently trying to revive a trade deal with Japan. Britain has been a main gateway for Japan to invest into the single market. The EU are quick to play the card that Japanese firms may have a problem if Britain decides on a hard Brexit opting for World Trade Organisation rules. The plot thickens and the uncertainly for both the pound and the Euro remain.

Thank you for reading my market report this morning, for further currency updates please call our team on 01494 725 353.

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