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Euro to Pound Exchange Rate Firm despite German Growth Disappointment

German Growth Figures Fall Short but Euro to Pound Exchange Rate Holds Wednesday Recovery

Despite a lack of fresh market demand for the Euro (EUR) in recent sessions, the Euro to Pound (EUR/GBP) exchange rate has held most of its Wednesday recovery and now trends just below the week’s opening levels, in the region of 0.8850.

This was despite Germany’s latest Gross Domestic Product (GDP) report falling short of analyst expectations.

The full 2017 growth figure was predicted to rise from 1.9% to 2.4%, but instead only reached 2.2%.

While the figure fell slightly short of expectations, it was still the nation’s fastest pace of growth in six years.

Analysts were likely unperturbed overall by the results due to how positively Germany’s growth outlook has changed since the end of 2016. Carsten Brzeski from ING explained;

‘There was a lot of concern at the end of 2016 about trade wars and a wave of protectionism — none of that came, and quite to the contrary, we saw world trade blooming and a rebound in demand from the Eurozone.’

Euro trade was also supported by news that the 2017 government budget figure had risen from 0.8% to 1.2%. This was the highest figure for the print since the German reunification.

Pound (GBP) Exchange Rates Lose Appeal Following Disappointing UK Trade Stats

Earlier in the week, the Pound (GBP) was bought from its lows due to hopes of a softer Brexit, but the British currency ended up shedding most of those gains against the Euro on Wednesday as UK data has been unimpressive.

Wednesday’s UK ecostats indicated that industrial and manufacturing production helped Britain’s growth in Q4 2017 more than expected.

NIESR’s Q4 growth estimate for Britain was also slightly better than expected, rising to 0.6% and beating the presumed figure of 0.5%.

However, markets were concerned about Britain’s November trade deficit update which widened further than expected to £-2.804b. Not only that, but the previous figure was revised lower from £-1.405b to £-2.270b.

The data indicated that the Pound’s fall in value since the Brexit vote was not helping to shrink the deficit as some analysts speculated it could.

Euro (EUR) Exchange Rates Supported by German Coalition Talks

On top of optimistic Eurozone data in recent sessions, the Euro to Pound (EUR/GBP) exchange rate has been able to hold away from its worst levels due to market hopes that a ‘grand coalition’ could be formed to run Germany’s next government.

Following an underwhelming election result for German Chancellor Angela Merkel in 2017, her CDU Party has been attempting to form a coalition in order to run the new government.

As the CDU and its biggest rival, the SPD Party, have agreed to some issues on immigration and climate in recent sessions, markets are hoping that the two parties are getting closer to beginning formal coalition negotiations.

The SPD Party was initially hesitant to form another ‘grand coalition’ with CDU, but for markets this would mean consistency with the previous government – an ideal outcome.

Euro to Pound (EUR/GBP) Forecast: Slew of Inflation Results Ahead

Consumer Price Index (CPI) data from December is likely to take focus for Euro to Pound (EUR/GBP) exchange rate investors over the coming week, as various finalised inflation stats from the Eurozone will be published as well as UK inflation data.

French and Spanish inflation results will be published on Friday, as well as Italian industrial production from November.

However, these are unlikely to cause much EUR/GBP movement ahead of next week’s more influential ecostats. As a result, the Euro to Pound exchange rate is likely to end the week relatively closely to its opening levels.

Next week’s economic calendar will be a lot busier. Eurozone trade balance data will be published on Monday, followed by key inflation stats from Germany, Italy and Britain on Tuesday.

Britain’s inflation report will be particularly influential. If it comes in higher than expected it’s likely to spark fresh speculation that the Bank of England (BoE) could be pressured into hiking UK interest rates again sometime this year.

On the other hand, if UK inflation comes in lower than the forecast 3% it would add to market concerns that UK inflation is still more due to Pound weakness than actual pressure in prices.

The Eurozone’s final December inflation and core inflation results will be published on Wednesday and could cause a shift in Euro movement if it surprises traders.