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Pound Euro (GBP/EUR) Exchange Rate Fails to Capitalise on Steady UK Inflation

Euro Currency Forecast

Pound Euro (GBP/EUR) Exchange Rate Unable to Hold Gains Despite UK Inflation Bettering Forecast

Although the headline UK consumer price index unexpectedly held steady at 3% in January this failed to shore up the Pound to Euro (GBP/EUR) exchange rate for long.

This stronger-than-expected showing still helped to boost demand for the Pound (GBP), though, with markets inclined to bet on the possibility of the Bank of England (BoE) raising interest rates again sooner rather than later.

As Ben Brettell, senior economist at Hargreaves Lansdown, commented:

‘Inflation’s now been above target for 12 straight months.

‘This adds further weight to the case for higher interest rates sooner rather than later. Indeed Bank of England policymakers said last week they’ll try and bring inflation back to target more quickly than previously expected, which means rates could rise faster and further than anticipated.’

As long as domestic inflation continues to outpace the BoE’s 2% target by a decent margin the possibility of an imminent BoE rate hike is likely to build.

Euro (EUR) Exchange Rate Strength Forecast on Robust Eurozone GDP

Further volatility is likely in store for the GBP/EUR exchange rate in response to the fourth quarter Eurozone and German gross domestic product data.

With forecasts pointing towards another solid quarter of economic growth, capping off a robust performance across 2017, the appeal of the Euro (EUR) looks set to pick up.

Signs that the Eurozone economy entered 2018 with strong growth momentum behind it could encourage EUR exchange rates to extend their recent gains.

However, confirmation that the German inflation rate contracted -0.7% on the month in January may be enough to temper any Euro bullishness.

On the other hand, if the global stock market recovery continues this will limit the downside bias of the single currency, with a weaker US Dollar (USD) offering support to EUR exchange rates.

A softer showing from the latest US consumer price index data could also weigh on the GBP/EUR exchange rate, further bolstering demand for the Euro.

Lack of Brexit Clarity Remains Major Headwind for GBP/EUR Exchange Rate

Brexit-based developments remain a significant headwind for the GBP/EUR exchange rate, and likely will do for some time yet to come.

Markets are still discouraged by the lack of clarity apparent in the Conservative government’s approach to the matter, giving investors little cause for confidence in the Pound.

So long as Theresa May’s cabinet remains so evidently divided on Brexit an element of uncertainty and tension is likely to persist.

Even so, GBP exchange rates could find a fresh rallying point ahead of the weekend if January’s UK retail sales data proves positive.

Forecasts suggest a solid uptick in retail sales excluding auto fuel, with the monthly measure expected to rebound from the previous month’s -1.6% contraction.

While the long-running wage squeeze looks unlikely to ease any time soon investors are likely to be reassured by signs that consumers are continuing to spend in spite of this.