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Pound to Euro Exchange Rate Falls despite Latest UK Data Boosting Q4 2017 Growth

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Britain’s Economy Performs Better than Expected but Pound to Euro Exchange Rate Falls

The Pound to Euro (GBP/EUR) exchange rate fell back from its best levels in three weeks on Wednesday morning. The Pound’s (GBP) losses were briefly limited by fresh UK data, but GBP/EUR still looked to shed over a quarter of a cent.

After climbing from the week’s opening levels of 1.1277 to a three week high of 1.1350 on Tuesday, GBP/EUR has slipped back and now trends nearer the interbank level of 1.1300.

Wednesday’s UK ecostats showed that many of Britain’s non-services sectors performed better than expected in November.

Manufacturing production was up to 0.4% month-on-month and 3.5% year-on-year, beating the respective predictions of 0.3% and 2.8%. The industrial production figures came in at 0.4% MoM and 2.5% YoY, both also beating expectations.

The data indicated that industrial activity would make a stronger contribution to UK growth towards the end of 2017 than previously anticipated.

While the yearly construction output figure only printed at 0.4%, it was still better than the figure of -1.1% that many analysts forecast.

Britain’s November trade deficit update was disappointing however. The figure widened to £-2.804b from October’s figure, which was revised lower from £-1.405b to £-2.270b.

Eurozone Data Continues to Impress Euro (EUR) Traders

This week’s Eurozone data has continued the recent trend of coming in higher than expected. Eurozone confidence stats and retail sales data largely beat forecasts on Monday.

Tuesday’s data was impressive too. Germany’s trade surplus rose higher than expected in November, from €18.9b to €23.7b.

The Eurozone’s November unemployment rate improved from 8.8% to 8.7% as forecast, boosting hopes that the bloc’s job market was becoming increasingly healthy.

Euro (EUR) Exchange Rates Supported by Hopes of German Grand Coalition

The Euro (EUR) has also remained appealing to investors this week thanks to political developments in Germany.

Tuesday saw Germany’s two biggest political parties, Chancellor Angela Merkel’s CDU and the centre-left SPD, reach an agreement on a law to attract skilled migrants. This news suggested to analysts that the two parties were getting closer to opening formal coalition talks.

The CDU and SPD parties previously formed a ‘grand coalition’ which led Germany for the four years into 2017, but the SPD had initially been hesitant to form another similar coalition following last year’s turbulent German election amid concerns that it could weaken the party’s appeal as an opposition.

However, as Merkel has been thus far unable to agree to another coalition big enough to form a government, CDU and SPD are under pressure to reconsider forming another grand coalition after all.

Further developments in German coalition talks have the potential to support the Euro in the coming months too, unless they fall through.

Pound to Euro Forecast: UK Inflation Due Next Week

The remainder of this week’s Pound to Euro (GBP/EUR) exchange movement is likely to be relatively narrow.

With this week’s UK data failing to be considerably influential and recent UK political and Brexit news doing little to affect the market’s outlook, Sterling trade is likely to be relatively range-bound and volatility has been falling.

Eurozone data is unlikely to notably impact Euro exchange rates either. Thursday will see the publication of 2017 growth data from Germany, while final December inflation stats from France and Spain will be published on Friday.

GBP/EUR investors are instead likely to be looking ahead to next Tuesday, when Britain’s own key December inflation report will be published.

If UK inflation comes in higher than expected rather than slipping as forecast, it could boost market hopes that the Bank of England (BoE) could be pressured into hiking UK interest rates again within the foreseeable future. This would lead to GBP/EUR gains.