The Euro has been strong against a flagging Pound recently and has the opportunity to further these gains if the UK’s central bank offers a gloomy outlook on the UK economy in 2017.
EUR GBP Exchange Rate Bolstered by Greek Inflation Recovery, UK Data Disappointment
The Euro was able to comfortably advance against the Pound during trading on January 11th, thanks to positive Eurozone data as well as yet another source of uncertainty arising in the UK.
For the Euro, support has come from Greek inflation rising from negative to positive ranges in December on the month and the year.
In UK news, the rush to stabilise the Northern Ireland Parliament after Martin McGuiness’ resignation has lowered confidence in Sterling, as has a major UK trade deficit expansion in November.
While UK annual construction output and production figures for November have risen, this news has been too little too late for a chronically-weakened GBP.
Euro Demand May be Tied to European Central Bank (ECB) Responses to Eurozone Inflation
If Eurozone inflation rates continue their current course and climb further in 2017, the European Central Bank (ECB) may be forced to take action to combat a potentially uncontrollable level of price increases across the currency bloc.
Ratings agency Standard and Poor’s has observed that;
‘Soaring headline inflation puts the ECB in a difficult position, as it needs to appease calls for higher interest rates by more hawkish policymakers, while making sure to prevent any unwarranted tightening in financial conditions’.
With this in mind, it will be worth paying close attention to any speeches from ECB policymakers and officials, whose perceived ability or inability to roll with escalating inflation will determine the value of the Euro by extension.
Pound Euro Exchange Rate Weakness could come from Future Bank of England (BoE) Dovishness
Asides from any Article 50 or Brexit news, announcements from the Bank of England (BoE) are one of the next major occurrences that could dramatically shift the performance of the Pound Euro exchange rate.
The BoE is due to make its first interest rate decision of the year on February 2nd, but just how policymakers might vote is a matter for debate.
Offering his take on the situation has been Markit’s Chris Williamson, who has stated;
‘[BOE] policymakers are clearly concerned about the extent to which Brexit-related uncertainty could slow growth this year. Any change in policy therefore looks unlikely in the short term, and the next move in policy could as much be a rate cut as a hike’.
Given how pessimistic BoE forecasts were for 2017 in the aftermath of the Brexit vote last year, the Pound could well drop if the BoE follows through on these forecasts with a dovish tone during talks next month.
Recent Interbank Exchange Rates
At the time of writing, the Euro Pound (EUR GBP) exchange rate was trending in the region of 0.86 and the Pound Euro (GBP EUR) exchange rate was trending in the region of 1.15.