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Will UK Inflation Data Cause Pound Sterling to Euro (GBP/EUR) Exchange Rate Volatility Next Week?

Pound Sterling Currency Forecast

Pound Sterling to Euro Exchange Rate Slumps as Markets Await Outcome of Davis and Hammond Trip to Germany on Brexit Charm Offensive

Markets are today awaiting the outcome of a charm offensive from David Davis and Philip Hammond, who are in Germany attempting to drum up support for the idea of giving the UK’s financial services industry special treatment in any post-Brexit trade deal, keeping the Pound Sterling to Euro (GBP/EUR) exchange rate on weak form.

A slew of UK data has failed to provide support for Sterling, despite largely positive industrial, manufacturing and construction output figures.

While the latest trade data showed an unexpected widening of the trade deficit month-on-month, the three-monthly figure was much more encouraging, showing a quarterly and annualised narrowing of the deficit.

Additionally, the National Institute for Economic and Social Research (NIESR) estimated GDP in the final quarter of 2017 to have accelerated to 0.6%.

But with Brexit-related developments hogging the headlines, the Pound was unable to find support from the data.

Will Wage Data Add to Pound Sterling to Euro (GBP/EUR) Exchange Rate Woes Next Week?

Tuesday’s release of December consumer price index figures will be the biggest driver of Pound Sterling to Euro (GBP/EUR) exchange rate volatility next week in terms of data.

While the headline inflation rate is expected to inch back from 3.1% to 3%, core inflation is predicted to hold steady at 2.7%, leaving UK consumers little better off.

This could weaken the Pound, as persistently-high prices are squeezing household budgets and affecting consumer spending, which could weigh on service sector activity and ultimately slow the UK economy.

So far the services sector and the economy have been able to escape the impact of surging inflation to some degree – the latest NIESR GDP estimate predicts fourth-quarter GDP will have recovered to around 0.6% – but markets continue to worry that the sector cannot escape the impact of sky-high inflation and sluggish wage growth forever.

Weakening inflation may therefore be met positively, especially as the Bank of England (BoE) is highly unlikely to tighten monetary policy again any time soon, meaning slowing price growth will not have a hugely negative impact upon the monetary policy outlook.

EUR Forecast to Rise if European Central Bank (ECB) Discusses Fixed End to Quantitative Easing Programme

Tomorrow sees the release of minutes from the 14th December European Central Bank monetary policy meeting, which could undermine the Pound Sterling to Euro (GBP/EUR) exchange rate.

The post-meeting communications showed that, while the bank holds an improved outlook upon the health of the Eurozone economy, its expectations for inflation remain restrained.

While the minutes will detail this pessimism, there could also be cause for the Euro to appreciate if policymakers have discussed the possibility of providing a definite end date for the quantitative easing programme.

The programme has already been extended multiple times and some policymakers worry that the Euro is still weighed down by market fears that the end date could be pushed back even further.

Select members of the Governing Council have therefore called for the ECB to stipulate a final end date, in order to help restrain Euro volatility, as traders will be more confident that the bond-buying programme will end.

Signs of talk along these lines in the meeting minutes could boost the Euro against the Pound.