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Euro Pound (EUR/GBP) Exchange Rate Tumbles as fall in Inflation Brings Relief to UK Consumers

EUR/GBP Exchange Rate Weakened by Positive Reaction to UK CPI Figures

The Euro Pound (EUR/GBP) exchange rate is trending higher this morning, following the release of the UK’s latest inflation figures.

At the time of writing EUR/GBP is up by around 0.2% from its opening levels this morning, with traders bracing for the possibility of further losses later in the session.

Pound (GBP) Rises as Fall in Inflation Signals End of Cost of Living Squeeze

The Pound climbed higher against the Euro this morning as markets welcomed the UK’s latest CPI figures.

According to data published by the Office for National Statistics (ONS) inflation plummeted to 2.7% in February, falling below forecasts of a more modest decline to 2.8% and falling below 3% for the first time since August.

The drop in inflation will come as a major relief to consumers, who have faced considerable financial pressure in recent months as soaring inflation and weak wage growth saw many workers face a fall in real pay.

Investors will be hopeful that the narrowing gap between inflation and wages will translate into increased consumer spending in the coming months as households feel more confident in loosening the purse strings.

However at the same time the drop in inflation may alleviate some of the pressure on Bank of England (BoE) to tighten monetary policy.

This could lead the BoE to strike a more dovish tone regarding the possibility of additional rate hikes this year, potentially denting the appeal of GBP.

Euro (EUR) Weakened by Gloomy Economic Sentiment

At the same time the Euro was put on the back foot this morning following a sharper than expected fall in Eurozone economic sentiment.

Figures released by ZEW suggest that economists are significantly less optimistic in their outlook for the Eurozone for the coming months, with the latest sentiment index plummeting from 29.3 to 13.4.

This was considerably lower than the more modest drop to 28.1 that had been forecast for March’s reading.

The largest than expected decline appeared to be largely driven by concerns over US trade protectionism and fears that a strong Euro may hamper growth.

A note from ZEW read;

‘Concerns over a US-led global trade conflict have made the experts more cautious in their prognoses. The strong euro is also hampering the economic outlook.’

EUR/GBP Forecast: UK Jobs Report to Lift Pound?

Looking ahead the EUR/GBP exchange rate may see further movement tomorrow as the UK publishes its latest employment figures.

Economists forecast that tomorrow’s data will show that the unemployment rate held at 4.4% in January while employment rose by a robust 84,000, possibly helping to support Sterling.

However it may be the accompanying earnings figures that have the most notable impact on the Pound, as wage growth is expected to rise to 2.6%, leaving it just shy of the current rate of inflation.

Meanwhile the Eurozone will publish its latest consumer confidence figures later this afternoon, with the majority of analysts predicting that sentiment will have remained positive in March.

However some observers suggest that the recent political uncertainty in Italy and slowing growth could have weighed on confidence this month, something that could easily move the index into negative territory, something that will likely weaken the Euro.