Surprise UK Inflation Dip Weighs Heavily on Pound Euro (GBP/EUR) Exchange Rate
An unexpected easing in the UK consumer price index saw the Pound Sterling to Euro (GBP/EUR) exchange rate return to a downtrend on Wednesday.
While forecasts had pointed towards a steady reading of 1.5% the headline inflation rate instead dipped to 1.3%, moving further away from the Bank of England’s (BoE) 2% target.
With BoE policymakers already expressing a sense of dovishness this disappointment prompted a fresh uptick in the odds of a January interest rate cut.
Fresh comments from BoE policymaker Michael Saunders added to the bearish mood of Pound Sterling (GBP), observing that there is ‘little to no growth’ in the UK economy at present.
Saunders’ speech noted:
‘With limited monetary policy space, risk management considerations favour a relatively prompt and aggressive response to downside risks at present.’
As markets braced against the increasing risk of an imminent rate cut the GBP/EUR exchange rate slipped lower once again.
Euro Shakes off Decline in Annual German Growth Rate
Confirmation that the German growth rate eased from 1.5% to just 0.6% in 2019 failed to weigh on the Euro (EUR), meanwhile.
As the deterioration in momentum was largely anticipated this helped EUR exchange rates to hold onto a relatively steady footing.
However, the mood towards the single currency could easily sour on Thursday if the European Central Bank’s (ECB) December meeting minutes fail to impress.
Fresh signs of caution from the central bank may see the Euro fall out of favour with investors, even though the prospect of further policy loosening appears distinctly limited.
On the other hand, if policymakers express a greater sense of optimism over the economic outlook this could help to shore up EUR exchange rates.
Recovery in UK Retail Spending to Limit GBP/EUR Exchange Rate Downside
A rallying point could be in store for the GBP/EUR exchange rate ahead of the weekend, however, if UK retail sales show a rebound.
After the disappointing showing seen in November forecasts point towards a solid month of sales growth over the Christmas period, reflecting a reduction in domestic political uncertainty.
While a positive month of retail sales may not dissuade BoE policymakers from pursuing an interest rate cut this could still encourage confidence in the economic outlook.
As stronger levels of consumer spending have helped to shore up economic activity in recent years a rebound in sales would improve the odds of a positive fourth quarter growth rate.
However, another contraction in sales would offer further weight to the case for an imminent interest rate cut, leaving the Pound open to additional selling pressure.
The GBP/EUR exchange rate could still find a floor in the days ahead, though, once markets finish pricing in the heightened odds of a BoE rate cut.