GBP/EUR: UK Businesses Remain Gloomy Regarding the Impact of Brexit on the Economy

24.08.17
3 minute read
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Brexit fears and strong eurozone data mean the pound euro exchange rate remains vulnerable. The pound fell over 0.5% versus the common currency to close the previous session in the region of €1.0835.

With little in the way of economic data for pound traders to digest, they instead turned their attention to Brexit headlines. Brexit news has been flowing through the week as the government publishes a series of positional papers. These papers set out the government’s stance on a number of key issues in a bid to show that they have a clear position, something which has been lacking so far.

Yet despite these papers, investors remain concerned that progress is slow. Meanwhile businesses are also gloomy regarding the impact they expect Brexit to have. A business economic conditions survey showed that businesses are increasingly pessimistic regarding Britain’s future economic stability. Concerns are growing over the future state of the economy, meaning firms are less willing to spend and invest in the face of growing uncertainty. Less spending and investment by companies is bad news for the economy. As a result, investors were keen to sell out of the pound, causing it to decline in value.

Looking across Thursday, investors will turn their attention to the UK GDP figures, which measures economic growth in the UK. Analysts have pencilled in an increase in growth of 0.3% on a quarterly basis and 1.7% on an annual basis. However, some analysts have expressed doubts over these numbers being reached given the slowdown in consumer spending over the previous few months. Should the UK economy have grown less than what analysts have forecast, then the pound could continue to fall lower versus the euro.

Why does poor economic data drag on a country’s currency?
Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.

Strong Data Boosts Euro

The main data points for the euro on Wednesday proved to be supportive, encouraging investors to buy into the common currency, pulling the pound euro exchange rate lower. First off, German manufacturing beat analysts’ expectations, as did data regarding the outlook for the manufacturing and service sectors for the entire eurozone bloc. Finally, a day of strong data was rounded off with an unexpected increase in consumer confidence. Stronger than forecast data caused the euro to gain ground. The positive sentiment surrounding the currency should be sufficient to keep the euro buoyant across today’s session, despite no influential economic data.

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