German and French Inflation Disappointment Boosts Pound to Euro (GBP/EUR) Exchange Rate
Demand for the Euro (EUR) was weaker on Wednesday, making it easier for the Pound to Euro (GBP/EUR) exchange rate to continue its advances. Sterling has benefitted from Euro weakness despite a lack of supportive UK data in recent sessions.
Mixed demand for both currencies has left GBP/EUR fluctuating since it opened at the level of 1.1361 on Monday. GBP/EUR has touched on highs of 1.1398 and lows of 1.1312, but on Wednesday morning the pair trended near 1.1360.
Overall, the pair has been stronger since Tuesday afternoon. This has been due to broader support for the US Dollar (USD), the Euro’s major rival, as well as underwhelming Eurozone ecostats.
Tuesday saw the publication of Germany’s February Consumer Price Index (CPI) projections. While the results met expectations month-on-month and improved from -0.7% to 0.5%, the yearly inflation rate slipped from 1.6% to 1.4% rather than the expected 1.5%.
According to Thomas Gitzel, economist from VP Bank;
‘Even in Germany, it almost seems like a feat to reach an inflation rate of over 2 percent — despite low unemployment and relatively high wage settlements,
Mario Draghi thereby lacks important arguments for a clear change of course. For the time being, higher interest rates remain nothing more than a pious wish,’
Wednesday morning followed with French inflation projections. French inflation was expected to rise to 1.5% year-on-year but instead slipped from 1.5% to 1.2%.
However, GBP/EUR gains were limited by the Eurozone’s overall inflation projections, which met analyst expectations and slipped from 1.3% to 1.2%, reassuring markets that inflation would not be worse than expected either.
Pound (GBP) Outlook Limited by Brexit Uncertainties
While the Pound could be in for another week of gains against the Euro, market demand for the currency has been limited. Investors are hesitant to pour into the British currency due to persistent uncertainties surrounding Brexit and how it may impact Britain’s economy.
The UK government’s stance on UK-EU Brexit negotiations and how ‘soft’ a Brexit they will attempt to negotiate is still perceived as unclear to investors.
While the opposition Labour Party has indicated it would support Britain remaining in an EU customs union after Brexit, rebels within the Conservative Party have indicated they are unlikely to vote with Labour in attempt to undermine the government’s position on its trade bill.
As a result of this and a lack of notable or strong UK ecostats in recent sessions, investors have had little reason to buy Sterling besides rising Bank of England (BoE) interest rate hike bets.
Wednesday’s UK consumer confidence figures from GfK worsened slightly from -9 to -10 in February as expected.
Pound to Euro (GBP/EUR) Forecast: Could Thursday Data Shift GBP/EUR Movement?
Eurozone data published so far this week has been too mixed to have a major effect on the Euro outlook, and stronger US Dollar (USD) performance has left Euro demand limp.
However, as Thursday will see the publication of most of this week’s most notable UK ecostats, the Pound to Euro (GBP/EUR) exchange rate outlook could be influenced.
Markit’s February UK manufacturing PMI will be published and is currently forecast to have slipped from 55.3 to 55.0. Bank of England (BoE) consumer credit from January and January mortgage data will be published too.
If UK manufacturing beats expectations, it could boost market hopes that British economic activity is still resilient despite Brexit uncertainties. This would make traders more confident that the BoE could tighten UK monetary policy again as soon as May.
Some notable Eurozone ecostats will be published on Thursday, including Spain’s final Q4 2017 Gross Domestic Product (GDP) projections and the Eurozone’s January unemployment rate. Markit will also publish its final Eurozone manufacturing figures for February.
Looking ahead, the Pound to Euro (GBP/EUR) exchange rate outlook has the potential to improve further if the UK government shows clarity on its Brexit stance and leans towards a ‘softer’ Brexit.
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