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Franco-German Proposal Optimism Weighs on the Pound Euro (GBP/EUR) Exchange Rate

Euro Currency Forecast

Pound Sterling Euro (GBP/EUR) Exchange Rate Slides on Prospect of ‘EU-Wide Agreement’

The Pound Sterling Euro (GBP/EUR) exchange rate slumped  by around -0.3% on Wednesday morning. This left the pairing trading at around €1.1176.

The single currency edged higher on Wednesday, supported by the Franco-German proposal for a common fund which could move Europe closer to a fiscal union.

According to Societe Generale director of forex, Kyosuke Suzuki:

‘The Franco-German agreement is big news. This has made it difficult for speculators to close their short positions on the currency.’

At the start of the week, France and Germany proposed a €500 billion recovery fund to offer grants to regions and sectors hit the hardest by the coronavirus pandemic. This would also allow borrowing by the European Commission on behalf of the EU.

This supported EUR as the proposals may move the EU closer to a transfer union which would help to balance the various economic differences in the bloc.

Senior economist at SMBC Nikko Securities, Keiko Tasaka noted:

‘It is a big step for large scale European fiscal support that Germany has changed its stance. But a EU-wide agreement still does not look easy.’

Weak British Inflation and Negative Rate Debate

Sterling slumped against the Euro after data revealed British inflation slowed to its weakest level since 2016.

April saw energy prices fall and the coronavirus crisis put the country into lockdown and throttle activity.

This meant consumer prices were only able to edge up by an annual rate of 0.8%, while monthly prices slumped by -0.2%.

The possibility of consistently low inflation is likely to spark further speculation that further action will be needed from the Bank of England (BoE). This will intensify the debate over taking interest rates into negative territory for the first time.

The fall last month was the steepest since 2008, and sent the headline inflation rate to less than half the bank’s target.

Commenting on this morning’s data release, European Strategist at wealth managers, Raymond James, Chris Bailey noted:

‘Talk of negative interest rates has been doing the rounds in recent weeks, but with inflation now trailing expectation, falling from 1.5% to 0.8%, that debate has become very real.

‘All eyes now turn to the Governor of the Bank of England’s comments later today for signs of further action to boost economic activity. The Bank of England does have room to move, if it wishes, and Governor Bailey has already laid out the red carpet for lower interest rates, so we can be sure it’s at the front of his mind.’

Pound Euro Outlook: Eurozone Consumer Confidence in Focus

Looking ahead to this afternoon, the Euro (EUR) could give up some of this morning’s gains against the Pound (GBP) following the release of flash confidence data.

If the Eurozone reports May’s confidence has declined more than expected due to the coronavirus crisis, the single currency will slide.

EUR could slide further on Thursday following the release of a slew of disappointing PMI surveys from the Eurozone.

If flash data reveals Germany’s manufacturing and service sector PMIs remain firmly in contraction territory, the Pound Euro (GBP/EUR) exchange rate could edge higher.