Although the latest UK GDP data bettered expectations this was not enough to dent the Euro Pound exchange rate for long, given that the economy remains imbalanced and vulnerable to further shocks.
- German consumer confidence improved – Outlook for Eurozone’s powerhouse economy remained mixed
- Strong UK GDP figures failed to encourage Pound bullishness – Investors concerned by heavy reliance on vulnerable service sector
- Eurogroup meeting could provoke Euro weakness – Greek bailout progress in focus
- EUR GBP exchange rate volatility forecast on BoE policy meeting – Odds of return to monetary tightening likely to remain slim
The resurgent strength of the US Dollar has limited the upside potential of the Euro, although this trend may prove short-lived.
Positive UK GDP Failed to Weigh on Euro Pound Exchange Rate
A better-than-expected uptick shown by the German GfK consumer confidence survey for February failed to boost the Euro (EUR) on Thursday morning. Investors remained generally bearish on the outlook of the Eurozone’s powerhouse economy, which could suffer from the increasingly protectionist stance of the new US administration and its potential implications for the German car industry.
Confidence in the Pound (GBP), meanwhile, was boosted as the fourth quarter UK GDP report showed that growth had remained steady at the end of 2016. This solid performance indicated that the negative impacts of the referendum result have yet to significantly drag on growth, although it seems unlikely that this trend will last once the uncertainty of negotiations gets underway.
The initial positive reaction of investors soon moderated, however, allowing the Euro Pound (EUR GBP) exchange rate to recover some ground. As the vast majority of the UK economy’s momentum remained based in the service sector and consumer spending, there were concerns that rising inflation could hamper this activity in the coming year. With the CBI reported sales figures also falling substantially short of forecast in January this helped to limit the upside potential of the Pound.
EUR GBP Exchange Rate Could Struggle to Capitalise on Stronger Eurozone Data
Demand for the Euro is not expected to find much encouragement ahead of the weekend, despite a forecast uptick in the German import price index and Eurozone M3 money supply. While both measures could signal an increase in inflationary pressure within the currency union any positive impact is likely to be limited. Given European Central Bank (ECB) President Mario Draghi’s comments that the Governing Council has yet to see signs of a meaningful increase in inflation speculation of a more hawkish policy outlook is considered unlikely.
Political developments will also have an impact on the appeal of the single currency, especially with the sense of uncertainty that continues to surround the future of the US. The latest Eurogroup meeting could put additional pressure on the Euro as investors will be looking for signs that progress is being made between Greece and its creditors. Any indications that there will be more delays to the next stage of the bailout program could severely dent the EUR GBP exchange rate.
BoE Policy Meeting Expected to Diminish Pound Sterling Demand
Brexit is expected to continue to dominate sentiment towards Sterling for the foreseeable future, with investors awaiting the publication of Theresa May’s promised white paper on the subject. Any signals that the government continues to favour a ‘clean break’ or harder form of Brexit could exacerbate the downside bias of the Pound, despite the prospect of increased government oversight of the process.
Further volatility could be in store for the Pound when the Bank of England (BoE) meets for its first policy decision of 2017. There is no expectation for policymakers to shift from their current neutral stance on interest rates, although the solid GDP figures could prompt some degree of optimism. If speculation of a return to monetary tightening remains limited then the EUR GBP exchange rate could strengthen.
As Liz Martins, UK economist at HSBC, noted:
‘The output gap is smaller and the labour market is tighter. But we are not persuaded that the structural story that has kept rates low till now has changed meaningfully. In a year full of uncertainty, even if you think our forecasts are overly pessimistic, raising rates will still be seen as risky. Rather, we think the Bank will look through higher inflation, passing it off as imported, rather than domestically generated.’
Current Interbank EUR GBP Exchange Rates
At the time of writing, the Euro to Pound (EUR GBP) exchange rate was making strong gains in the region of 0.85, while the Pound Euro (GBP EUR) pairing was slumped around 1.17.