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Pound to Euro Exchange Rate Forecast: Weak Inflation to Put Pressure on BoE to Cut Rates in 2020?

Bank of England

GBP/EUR Exchange Rate Muted as UK Inflation Stalls

The Pound Euro (GBP/EUR) exchange rate is languishing at a two-week low this morning as markets react to the UK’s consumer price index.

At the time of writing the GBP/EUR exchange rate is trading at around €1.1768, virtually unchanged from this morning opening rate.

Dovish BoE to Dent the Pound (GBP)?

The deluge of UK economic data continues this morning, with the publication of the UK’s latest CPI figures leaving the Pound (GBP) mostly rangebound.

According to data published by the Office for National Statistics (ONS), inflation remained flat at 1.5% in November, beating expectations it would slip to 1.4% but still leaving it stuck at a three-year low and well below the Bank of England’s (BoE) target rate of 2%.

The result comes as the BoE prepares to deliver its final rate decision of 2019 on Thursday.

Two members of the Monetary Policy Committee (MPC) surprised markets last month by breaking ranks and calling for an immediate rate cut.

While no policy changes are expected from the BoE this month, the recent slump in inflation is sure to bolster calls from within the bank for it to begin easing its monetary policy.

Analysts also expect the BoE to drop some clear signals that it will cut rates in 2020 on the back of Boris Johnson’s stunning election victory.

With a clear majority in parliament Johnson should be able to easily pass his EU withdrawal deal, providing markets with some short-term clarity on Brexit and likely giving the BoE the confidence to begin cutting rates next year.

Euro (EUR) Buoyed as German Business Morale Improves

At the same time, the Euro (EUR) has found some modest support this morning in response to stronger-than-expect German business sentiment.

The Ifo institute reported its business climate index rose to 96.3 in December, rebounding from an upwardly revised 95.1 in December and beating expectations of a more modest rise to 95.5.

Clemens Fuest President of the ifo Institute, comments:

‘In the run-up to Christmas, sentiment among German executives has improved noticeably. The German economy is heading into the New Year with more confidence.’

EUR investors also welcomed the institute’s economic forecasts, which predict German GDP is on track to expand by 0.2% in the fourth quarter.