- UK YoY inflation drops to 2.6% in June – Pound Sterling plummets against majors.
- Eurozone ZEW economic sentiment below expectations – Euro remains unperturbed.
- Thursday’s European Central Bank decision looms – Dovish outlook expected.
After a relatively quiet Monday the Euro Pound exchange rate hit a weekly high of 0.8884 this morning after the release of worse than anticipated year-on-year UK inflation figures.
The UK’s annual inflation fell to 2.6% in June, down from May’s four year high of 2.9%. This demonstrates that living standards within the UK are still being squeezed as prices are still exceeding wage growth. In this respect, the near-term rate hike bets from the Bank of England (BoE) have taken a hit, reducing demand for Sterling.
Euro Climbs, Unperturbed by Weaker Eurozone Economic Confidence
The ZEW economic confidence index figures were released today for both the Eurozone as a whole and Germany, both of which came in lower than forecast.
The overall Eurozone figure saw a dip from 37.7 to 35.6, but overall the economic confidence of the Eurozone, Germany in particular, remains historically quite high, so the Euro didn’t see any significant movement as a result.
ZEW President Achim Wambach stated:
‘Our overall assessment of the economic development in Germany remains unchanged compared to the previous month. The outlook for the German economic growth in the coming six months continues to be positive. This is now also reflected in the survey results for the Eurozone’.
Brexit Negotiations a Bumpy Road for Sterling
This week has seen Brexit negotiations resuming, with key divisive topics ranging from the Brexit divorce bill to the rights of EU citizens within the UK.
Investors are anxious that talks may continue to go slowly and with repeated scandalous rambunction – speculation that, in itself, drives demand away from Sterling during the transition. Conversely any indication of agreement between the two nations is likely to return some demand back for the Pound.
EUR GBP Forecast: Will the European Central Bank Turn More Dovish?
After Canada’s rate rise last week markets are primed for the possibility of more central banks winding back their accommodative monetary policy, but so far the messages from the ECB have been mixed. At the previous meeting the ECB was somewhat cautious, but still left room for more hawkishness towards the end of the year.
This was, however, before the release of the Eurozone’s inflation data, which demonstrated that there remains a great deal of distance between the actual figure and their target.
Should the ECB become more dovish, or if they indicate that quantitative easing could be left alone for longer than previously thought, then the Euro will likely drop, giving Sterling room to make a late-week recovery.
One alternative is, of course, that the ECB’s latest meeting contains mention of tapering their quantitative easing, something that will drive even more demand for the Euro.
Current Interbank EUR GBP Exchange Rates
At the time of writing, the Euro to Pound Sterling (EUR GBP) exchange rate was trading at 0.8895 and the Pound Sterling to Euro (GBP EUR) exchange rate was trading at 1.1242.