Rising German Producer Prices Fail to Encourage Euro (EUR) Gains
Stronger-than-expected German producer price index figures failed to weigh down the Pound Sterling to Euro (GBP/EUR) exchange rate.
While this latest uptick in producer prices suggests that inflationary pressure is continuing to build within the Eurozone’s powerhouse economy the mood towards the Euro (EUR) remained muted.
Investors still see little likelihood of the European Central Bank (ECB) raising interest rates in the coming months, even though inflation has risen over the ECB’s 2% target.
The ongoing dispute over the Italian government’s 2019 budget proposal continues to weigh on the outlook of the single currency, meanwhile.
As the European Commission is expected to reject the budget and demand a rewrite to bring the deficit target in line with the EU’s 2% rule the potential remains for a heightening of political tensions.
This may keep EUR exchange rates on the back foot in the near term, even after Italian officials ruled out the suggestion that the country could be at risk of leaving the EU.
GBP/EUR Exchange Rate Upside Limited by Brexit Uncertainty
Brexit-based uncertainty has continued to limit the appeal of Pound Sterling (GBP), meanwhile, as the issue of the Irish border keeps talks at an impasse.
As Brian Martin, research analyst at ANZ, commented:
‘The inability to reach a compromise on this matter is increasing the probability of a ‘no deal’. Alternatively, an extension to the Article 50 deadline or a general election are possibilities. There are even calls for a second referendum.
‘Heightened uncertainty over the future direction of the UK is weighing on business sentiment, production and investment decisions.
‘Sterling is showing increasing vulnerability to this rise in uncertainty.’
With the DUP looking poised to throw their weight behind an amendment which would make the Northern Ireland backstop illegal investors remain wary of the prospect of a no-deal scenario.
If Theresa May fails to shore up support for her Brexit plans among MPs in the days ahead this could see the GBP/EUR exchange rate shedding ground once again.
Hawkish ECB Announcement Could Bolster Euro (EUR) Exchange Rates
Further volatility is forecast for the GBP/EUR exchange rate on the back of Thursday’s ECB policy announcement.
While there is no expectation for the central bank to make any changes at this stage investors are still keen to gauge the outlook of policymakers.
If the ECB shows signs of greater hawkishness, however, this may encourage the Euro to push higher against its rivals.
As long as the ECB looks set to wind down its quantitative easing program before the end of the year this should offer some support to EUR exchange rates.
On the other hand, if policymakers show signs of increased caution over the economic outlook and diminish the odds of a 2019 interest rate hike this may limit the appeal of the single currency.
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