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Unexpectedly Negative Eurozone Inflation Boosts Pound Euro (GBP/EUR) Exchange Rate to Monthly Best

European Central Bank

Negative Eurozone Inflation Pushes Pound Euro (GBP/EUR) Exchange Rate Higher

The Eurozone consumer price index fell significantly short of expectations in August, plunging from 0.4% to -0.2% and offering a boost to the Pound Sterling to Euro (GBP/EUR) exchange rate.

While forecasts had pointed towards a softening of the inflation rate this fresh dip into negative territory caught markets off guard.

As a result, the Euro (EUR) fell largely out of favour this morning, with investors awaiting the European Central Bank’s (ECB) response to the lacklustre data.

With the ECB already offering significant stimulus to the Eurozone economy, thanks to its long-running quantitative easing programme, there appears little room for policy adjustment.

Even so, as inflation continues to trail far behind the central bank’s 2% target the case for further stimulus appears to have strengthened.

Although August’s finalised raft of Eurozone manufacturing PMIs showed signs of economic recovery this was not enough to shore up EUR exchange rates in the face of the poor inflation data.

Further Signs of ECB Dovishness Set to Weigh on Euro (EUR) Exchange Rates

Upcoming commentary from ECB policymakers could see the Euro shedding further ground against its rivals.

As the inflation rate has now fallen short of the ECB target for more than seven years policymakers are likely to take a dovish outlook.

Given that the currency union had already shown signs of struggling even before the outbreak of the Covid-19 pandemic the chances of any imminent return to form appears limited.

The drag of disinflation could force the central bank to take further action in the near future, in spite of the already significant size of its Pandemic Emergency Purchase Programme.

However, if policymakers fail to signal an intent to engage in prompt policy action this may limit the downside potential of EUR exchange rates in the near term.

Unless the finalised set of Eurozone services PMI readings for August surprise to the upside the GBP/EUR exchange rate could hold onto a positive bias this week.

Solid UK Services PMI Forecast to Shore up GBP/EUR Exchange Rate Gains

Demand for Pound Sterling (GBP) may pick up further in the coming week, meanwhile, if the latest UK services PMI report proves encouraging.

Confirmation that the service sector saw strong expansion in August could see the GBP/EUR exchange rate rise to a fresh monthly high.

As long as the service sector can demonstrate fresh signs of shaking off the impact of the Covid-19 pandemic worries over the outlook of the UK economy are likely to ease.

Although a significant degree of uncertainty continues to hang over the economy, especially in the face of the approaching Brexit cut-off, the mood towards the Pound could still improve.

On the other hand, any downward revision to the headline PMI reading may prompt the GBP/EUR exchange rate to stumble.

With the ultimate impact of the ongoing pandemic yet to be revealed the Pound could struggle to hold onto a bullish footing for long in the absence of additional supportive data.