Pound Euro (GBP/EUR) Exchange Rate Under Pressure as Fresh Covid-19 Restrictions Loom

Spanish Trade Deficit Surprise Unable to Shore up Pound Euro (GBP/EUR) Exchange Rate

A surprise fall into deficit for the Spanish trade balance was not enough to keep the Pound Sterling to Euro (GBP/EUR) exchange rate from falling.

While forecasts had pointed towards the trade balance remaining in a state of surplus in July the figures disappointed, showing a -€0.31 billion deficit instead.

This suggests that trade conditions within the Spanish economy materially weakened at the start of the third quarter, casting fresh doubt over the odds of an imminent economic recovery.

However, support for Pound Sterling (GBP) generally weakened at the start of the week thanks to a resurgence in Covid-19 anxiety.

With the UK government reportedly considering a second national lockdown hopes of the economy bouncing back in the second half of 2020 faded.

As the economy looks set to come under further pressure in the final months of the year, especially given lingering Brexit uncertainty, the possibility of a fresh recession weighed on GBP exchange rates.

Euro Sensitive to European Central Bank (ECB) Commentary

Upcoming comments from European Central Bank (ECB) President Christine Lagarde may put some pressure on the Euro (EUR), though.

Although Lagarde talked down the impact of EUR exchange rates on monetary policy at the ECB’s September meeting investors are wary of the potential for any shift in tone.

If Lagarde shows any signs of concern over the relative strength of the single currency this may encourage a bout of selling pressure, offering the GBP/EUR exchange rate a potential boost.

As long as the ECB appears on track to introduce fresh monetary stimulus measures before the end of the year this could limit the upside potential of the Euro.

On the other hand, a lack of dovishness from Lagarde may increase the downside pressure on the GBP/EUR exchange rate as markets bet on the ECB’s inability to puncture the strength of the single currency.

Improved CBI Industrial Trends Orders May Offer Pound Boost

The mood towards the Pound could improve on the back of September’s CBI industrial trends orders index, meanwhile.

Forecasts suggest a modest improvement on the month, picking up from -44 to -41 as the impact of the initial Covid-19 lockdown began to fade.

A stronger industrial performance may encourage some confidence in the underlying health of the UK economy, adding to hopes that recession pressures eased in the third quarter.

Even so, with the index looking set to remain firmly in negative territory any boost from the data could prove limited.

If the UK government follows through with fresh restrictions in response to the rise in Covid-19 cases this week demand for the Pound could weaken further.

As long as the economy appears on track for even greater disruption the GBP/EUR exchange rate looks set to remain on the back foot.