The Pound to Euro (GBP/EUR) exchange rate held steady today, with the pairing currently trading around €1.109.
Brexit developments have taken a positive turn this morning, as European Commission President, Ursula von der Leyen said that a ‘path to agreement’ now exists, strengthening the Pound.
Speaking to MEP’s this morning von der Leyen said:
‘The path may be very narrow, but it is there, and it is therefore our responsibility to continue trying.’
Consequently, GBP investors are optimistic that the UK could leave the EU with a last minute trade deal on January 1st.
Today saw the release of November’s UK Consumer Price Index, which fell below forecasts from 0.7% to 0.3%, which failed to weigh on GBP exchange rates as Brexit developments dominated sentiment.
However, inflation could rise in 2021 should the UK leave the EU without a trade deal.
Ruth Gregory, an analyst at Capital Economics, explained:
‘The sharp fall in inflation from 0.7% in October to 0.3% in November and in the core rate from 1.5% to 1.1% came as a bit of a surprise. Some of these moves were driven by temporary factors so we still expect inflation to rise temporarily back towards the 2% target next year.
‘Beyond that, though, the slack in the economy should keep underlying price pressures subdued and allow inflation to drop back to 1.5% in 2022. That is unless a no deal Brexit pushes it up to a peak of 3-4%.’
Euro (EUR) Holds Steady as Eurozone PMI Remains in Contraction
The Euro (EUR) struggled to make any gains against the Pound this morning despite stronger-than-expected Eurozone PMIs for December.
Although service sector activity remained in contraction territory, it bettered forecasts while manufacturing activity indicated strong growth.
Chris Williamson, the Chief Business Economist at IHS, commented:
‘The data hint at the economy close to stabilising after having plunged back into a severe decline in November amid renewed Covid-19 lockdown measures. The fourth quarter downturn consequently looks far less steep than the hit from the pandemic seen earlier in the year, though the picture is very mixed by sector.’
Furthermore, Germany has re-entered a ‘hard lockdown’ closing schools and non-essential businesses in an attempt to stop a sharp rise in Covid-19 infections, with measures in place until 10 January.
These new restrictions ignited fears that the Eurozone’s largest economy could suffer immensely, and Q4 growth will suffer.
GBP/EUR Forecast: BoE Rate Decision Could Undermine the Pound
Pound (GBP) investors will be looking to tomorrow’s Bank of England (BoE) interest rate decision, although the rate is not expected to change from 0.1%.
Instead, any pessimistic commentary about the state of the British economy would prove to be GBP-negative.
Brexit will continue to remain a key focus in the coming weeks in the GBP/EUR exchange rate. Any further indications that a post-Brexit trade deal is imminent will boost the Sterling.
Meanwhile, Euro (EUR) investors will await tomorrow’s release of the Eurozone’s Consumer Price Index for November.
The final inflation reading for November is expected to confirm that the Eurozone remained in a state of deflation, likely weighing on EUR exchange rates.