As Tuesday’s session progressed the Euro to Pound (EUR/GBP) exchange rate firmed after Bank of England policy makers reaffirmed their warning that UK inflation could fall below 1% and that the biggest threat to the economy comes in the form of weak Eurozone.
Earlier in the session The Euro to Pound (EUR/GBP) exchange rate firmed on after European Central Bank (ECB) Executive board member Benoit Coeure said that the bank would not make hasty decisions when considering introducing new stimulus measures. Also aiding the Euro was the release of better than forecast consumer confidence data out of France and German GDP data which matched economist expectations.
The Euro to Pound exchange rate is forecast to experience volatility on Tuesday if the final third quarter German GDP report offers any unexpected surprises. Italian retail sales will also be in focus.
The Euro to Pound (EUR/GBP) exchange rate was mixed on Monday as data out of Germany offered support to the single currency and Sterling’s recent losses were deemed as overdone.
The Euro to Pound (EUR/GBP) exchange rate strengthened back above the 1.26 level after European Central Bank (ECB) President Mario Draghi said that policy makers would broaden their asset-purchasing programme if inflation across the Eurozone continued to fall.
Draghi’s Speech Sees Euro to Pound Sterling (EUR/GBP) Exchange Rate Decline
‘The ECB is going to be delivering something more substantial at its meeting in December and Draghi’s comments have been very much in line in confirming our view. People haven’t got as much of this trade on as they really want, which is why we’ve been seeing such a big reaction in the price to his comments,’ said a currency strategist from BNP Paribas.
Sterling advanced above 1.26 against the single currency but weakened broadly against many of its major peers as a second by-election win for UKIP worried economists that the anti-EU party could make significant gains at next May’s general election.
‘A swing toward a party which is committed to leaving Europe and which could conceivably represent the balance of power is immensely significant. It will be perceived as adding to uncertainty about the UK’s membership of the EU. If the UK were to leave the EU, our view is that would be negative for Sterling,’ said a global strategist at Societe Generale.
Euro to Pound (EUR/GBP) Exchange Rate Forecast
The Euro is likely to remain weaker against the Pound at the start of next week as Mario Draghi’s comments are expected to continue to weigh heavily on the single currency. Due for release on Monday is the latest German IFO Business Climate data, which is likely to show a fall in expectations and conditions.
Last month German business confidence dropped to its lowest level since mid 2012, prompting this response from Pantheon Macro; ‘The headline German business confidence index continues to point to subdued growth ahead for the industrial sector in the euro area’s largest economy, with the decline in both the headline and expectations reinforcing the downtrend that began in April … The overall message from the IFO survey is one of weak growth ahead, and elevated downside risks for growth in the fourth quarter.’
On Tuesday, the EUR/GBP exchange rate could regain some ground if German Retail Sales data comes in positively and Final German GDP data confirms that the currency bloc’s largest economy avoided sliding into recession in the third quarter of the year.
The main event for Wednesday’s session will be UK GDP data. Sterling could weaken if the data comes in softer than first estimated. Economists are expecting UK GDP to have increased by 0.7% in the third quarter, down from the previous estimation of a 0.9% increase.
Thursday will see the release of the latest German Unemployment data and Spanish GDP data. Signs of improvement in either of those reports are likely to aid the Euro. The only piece of data relevant to the UK will be the low impact Lloyds Business Barometer report.
Friday promises to be another day of volatility for the currency pair as the Pound is likely to be influenced by the latest Gfk Consumer Confidence data, which is forecast to show an improvement. The Euro meanwhile could find support if anticipated inflation data and unemployment reports come in better than forecast.
The last batch of unemployment data showed that the level of joblessness in the Eurozone held at 11.5%. Markit economist Rob Dobson said of the result; ‘Rather than being positive or negative, it’s a very static picture. What we are seeing in the Eurozone is high unemployment. What these figures suggest is that, after signs that [unemployment] was coming down in the mid-year, joblessness has remained static and has shown no signs of moving down. If the Eurozone wants to move into a sustained and real recovery – creating jobs – it’s going to be key to achieving that.’
Last month inflation in the Eurozone ticked slightly higher, prompting this response from economist Martin van Vliet; ‘Given the recent, sharp drop in commodity prices, we do not expect the food and energy component to provide further upward pressure to the headline rate in coming months – if anything, renewed downward pressure may be in the pipeline. Against this backdrop and with Eurozone economic growth lacklustre, the ECB will likely remain under pressure to do more to steer inflation back to their target.’
A pickup in inflation could see the Euro to Pound Sterling (EUR/GBP) exchange rate advance.
