The outlook for Eurozone inflation has improved on fresh data, helping the EUR GBP exchange rate to register strong gains.
- Supply of Euros in circulation increases above forecast
- Investors revise inflation outlook
- Pound weakens as investors return to GBP shorting
- US data forecast to create volatility for EUR GBP exchange rate
With the latest key events for the Pound outlook now in the past, a lack of focus while the Article 50 bill is debated in Parliament has weakened appetite for Sterling.
Improved Inflation Outlook Helps Boost EUR GBP Exchange Rates
European Central Bank (ECB) President Mario Draghi recently poured cold water on hopes that recent strong Eurozone inflation data would prompt a hawkish shift in outlook amongst policymakers. Draghi, however, attributed the recent strong rise in price growth to crude oil market volatility, rather than building price pressures across the currency bloc.
But the outlook for inflation has been improved by new data this morning. The M3 money supply growth measure for December has grown faster than forecast. The M3 supply measures the total volume of Euros and assets denominated in Euros (such as stocks and short-dated bonds) in circulation.
An increasing money supply means that there are more Euros in the system, which erodes the currency’s purchasing power. This means more Euros are required to buy the same value items or services as previously, inflating consumer prices.
Expected to accelerate from 4.8% to 4.9% at the end of last year, M3 growth instead clocked in at 5%, rising at a much faster pace than was seen for much of 2016.
This has naturally encouraged investors to review their bearishness on Eurozone monetary policy, boosting the common currency as speculators go long on EUR GBP exchange rates.
Weak Appeal for Sterling Keeps GBP EUR on the Downtrend
With Theresa May’s Brexit speech and the Supreme Court decision behind us, investors are finding little else to focus on at present. True, the bill to trigger Article 50 has already been put to Parliament for debate, but as this process will take at least five days before lawmakers vote, there is nothing in the immediate future to overly-influence GBP trade.
The Supreme Court judgement had been largely anticipated to go against the government, so investors were expecting Sterling to appreciate. Now that this upside risk is over, the focus has returned to the impending Brexit and therefore the likelihood that GBP EUR will weaken further. GBP is being pressured lower today as investors take out short positions on the currency.
This means traders overseas are borrowing Pounds from a broker and then converting them into Euros. When the Pound weakens, the Euros the traders now hold will be worth more Sterling than when they undertook their initial GBP EUR trade. The trader can then convert the Euros back into Pounds to profit on the improved exchange rate. It is this flood of traders wanting to sell Sterling in favour of the Euro in order to establish a short position that is helping drive the EUR GBP exchange rate higher today.
The Pound had enjoy some attention in recent days thanks to investor uncertainty over how likely US President Donald Trump was to make good on his election campaign promises of higher fiscal spending. GBP became a handy refuge from market volatility, as riskier assets and the US Dollar and Euro were all much more exposed to the President’s actions and comments than the Pound. But now that confidence in Trump is returning, the Pound has lost a vital source of support.
EUR GBP Exchange Rate Forecast; US Data to Unsettle Euro Dominance Later?
The day’s notable Eurozone data has all been released today, while there are no UK releases scheduled before the weekend. Comments from the Ecofin meeting could generate some movement for the Euro, while the Pound could become jittery ahead of Theresa May’s meeting with US President Donald Trump. While focus is meant to be on a potential UK-US trade deal, May is under pressure to stand up to the President regarding his recent comments on the use of torture, amongst other issues.
Upcoming US data could create some turbulence for the EUR GBP exchange rate later. US GDP data for the fourth quarter is expected to show a marked slowdown from 3.5% to 2.2%. However, this is due to a surge in soybean exports during the third quarter, thanks to a shortage in South Africa. 2.2% would still be a strong result in context; bettered only twice since the final quarter of 2014.
Combined with an expected recovery in durable goods orders in December from -4.6% to 2.6%, this could strengthen the ‘Greenback’ and weaken EUR GBP exchange rate gains.
Interbank EUR GBP Exchange Rate
At the time of writing the EUR GBP exchange rate was trending up 0.4% on opening levels, in the region of 0.85. The GBP EUR exchange rate had slumped to around 1.17.