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Euro Pound (EUR/GBP) Exchange Rate Trends Narrowly Despite Strong ECB 2018 Forecasts

Optimistic ECB 2018 Forecast Fails to Boost Euro Pound (EUR/GBP) Exchange Rate

Although the European Central Bank’s (ECB) 2018 economic forecast proved optimistic the Euro Pound Sterling (EUR/GBP) exchange rate struggled to make any particular headway.

This was largely due to the underlying dovishness of the ECB’s message, with policymakers expecting to maintain a significant degree of monetary stimulus in the coming year.

Forecasts still expect domestic inflationary pressure to lag behind the ECB target of 2% for some time to come, keeping the Euro (EUR) from gaining any particular momentum.

Even a weaker US Dollar (USD) was not enough to bolster the EUR/GBP exchange rate on Thursday, despite the Euro generally benefitting from the latest disappointing US data.

EUR/GBP Exchange Rate Shrugs off Weakening UK Mortgage Approvals

The EUR/GBP exchange rate also failed to capitalise on the disappointing nature of the latest BBA mortgage approvals data.

While approvals fell further than forecast in November the mood towards the Pound Sterling (GBP) failed to sour significantly.

This weaker showing does not bode well for the UK economic outlook, though, offering the latest indication that confidence amongst consumers and lenders is softening.

A lack of fresh developments regarding Brexit helped to limit the downside bias of GBP exchange rates, meanwhile, as investor jitters eased for the time being.

As markets have already priced in a significant degree of Pound weakness in anticipation of Brexit the potential for further GBP bearishness has eased somewhat.

Sylwia Hubar, research analyst at Natixis, noted:

‘UK should continue growing at a reduced level of potential, yet risks are tilted to the downside amid Brexit negotiations. On the upside, Brexit-related worries have been downplayed in mid-December as the EU and the UK agreed to move forward to the second phase of negotiations. In addition, sound fiscal performance in 2017 has provided the UK with leeway to consolidate fiscal finances at a slower pace or even loosen fiscal stance should the economy disappoint.’

EUR/GBP Exchange Rate Volatility Forecast on Latest German Inflation Data

Greater volatility is expected for the EUR/GBP exchange rate ahead of the weekend, however, with the release of the latest German consumer price index data.

Given the ECB’s continued focus on the subject of inflation EUR exchange rates could see some major movement on the back of the CPI figures.

However, forecasts point towards a slight weakening on the year in December, with price growth expected to ease from 1.8% to 1.5%.

This softening could give the ECB further incentive to maintain its dovish policy bias for the foreseeable future, reducing the odds of any imminent end to the long-running quantitative easing program.

On the other hand, if inflationary pressure shows fresh signs of strengthening then the EUR/GBP exchange rate is forecast to extend its gains further heading into 2018.