A solid uptick in German inflation helped to bolster the EUR GBP exchange rate ahead of the weekend.
- Northern Ireland Brexit legal challenge dismissed by High Court – EUR GBP exchange rate rallied as investor worries mounted
- German Consumer Price Index strengthened in October – Euro boosted by robustness of Eurozone’s powerhouse economy
- Rising odds of 2016 Fed rate hike could weigh on single currency – Central bank divergence to limit Euro strength
- BoE policy decision in focus – Pound expected to weaken despite lack of interest rate cut
Brexit-based uncertainty continues to drag on the Pound, meanwhile, with the prospect of a hard exit still weighing on the outlook of the UK economy.
Defeat of Northern Irish Brexit Challenge Prompted EUR GBP Exchange Rate Gains
Investors were encouraged ahead of the weekend as October’s German Consumer Price Index was found to have risen to 0.8% on the year, in line with forecasts. This indicated that inflationary pressure within the Eurozone’s powerhouse economy continued to build, a positive sign for the wider currency union. As a result the Euro (EUR) was prompted to trend higher across the board, despite markets continuing to expect an extension of the European Central Bank’s (ECB) quantitative easing program in December.
Confidence in the Pound (GBP), meanwhile, slumped dramatically when it was announced that Northern Ireland’s High Court had ruled in favour of the government over a Brexit legal challenge. Campaigners had argued that a parliamentary vote was required before the triggering of Article 50, something which had offered investors some hope of a more moderate exit process. However, with this first challenge to Brexit knocked back the Euro Pound (EUR GBP) rallied strongly.
Higher Eurozone Inflation Rate Could Boost Euro (EUR) Demand Today
This morning is likely to see support for the Euro weaken somewhat, with investors jittery ahead of the Eurozone CPI reading for October. If inflationary pressure is not found to have advanced in tandem with the German figures then the appeal of the single currency could be muted. A stronger showing, though, could lead to markets revising the odds of the ECB enacting further easing measures before the end of the year.
Demand for the Euro could be weakened if investors continue to pile into the US Dollar (USD), with higher odds of a 2016 interest rate hike from the Federal Reserve expected to dent the single currency. Greater policy divergence between the ECB and the Fed would not be positive for the Euro, even though a reduced atmosphere of risk appetite could boost the EUR GBP exchange rate.
EUR GBP Exchange Rate Forecast to Benefit from Dovish BoE Outlook
Sterling is expected to remain under pressure ahead of the Bank of England’s (BoE) November policy meeting, even though no change in monetary policy is anticipated at this juncture. Investors will be paying close attention to the tone of policymakers, with any indications of greater dovishness likely to drive the Pound down across the board. As Jane Foley, Senior FX Strategist at Rabobank, noted:
‘Our expectation that the BoE is unlikely to cut the Bank rate again at next week’s MPC meeting may offer the pound some protection in the weeks ahead. However, in the absence of any back down by the government on its hard Brexit position, sterling is likely to remain a vulnerable currency.’
The EUR GBP exchange rate could also be moved by the latest raft of UK PMIs, which are expected to show a loss of momentum on the month. If economic activity is found to have weakened in October this could exacerbate the Brexit-based anxiety which continues to surround the Pound. On the other hand, the impact of positive results is likely to be more limited as Sterling remains biased to the downside.