Euro Pound Sterling (EUR/GBP) Exchange Rate Strengthens on Higher Eurozone Inflation
Confirmation that the headline Eurozone consumer price index strengthened to 2.1% in July encouraged the Euro to Pound Sterling (EUR/GBP) exchange rate to push higher.
With inflation now above the European Central Bank’s (ECB) 2% target rate the odds of further policy tightening have risen.
This offered a fresh boost to the Euro (EUR) ahead of the weekend, helping to reverse the weakness brought on by the Turkish financial crisis.
As the Turkish Lira (TRY) recovered some of its recent sharp losses the general sense of market risk appetite improved, benefitting the single currency.
Although questions remain over the ultimate health of the Turkish economy the impact of political worries is likely to ease in the near term, given the more limited threat of contagion spreading into the European banking sector.
Brexit-Based Uncertainty Shores up EUR/GBP Exchange Rate
A resurgence in market worries over Brexit offered an additional boost to the Euro to Pound Sterling (EUR/GBP) exchange rate ahead of the weekend.
With tangible progress towards a deal still lacking investors saw little reason to favour Pound Sterling (GBP) as the odds of a no deal Brexit remain uncomfortably high.
In spite of the improvement seen in July’s UK retail sales data GBP exchange rates have struggled to find particular support over the course of the week.
As Imre Speizer, Research Analyst at Westpac, commented:
‘The recent uptick in headline inflation and fall in unemployment to a 43-year low haven’t helped GBP much since wage inflation remains low and markets are sceptical about further BoE rate hikes. BoE Governor Carney said that market pricing for one rate rise a year for the next several years was a good rule of thumb.
‘Carney also said the chances of a no-deal Brexit are uncomfortably high. As long as Brexit uncertainty persists, GBP should remain an underperformer – it is the worst among G10 since mid-April.’
Without the support of encouraging domestic data the Pound looks set to suffer further from political jitters.
Euro Pound Sterling (EUR/GBP) Exchange Rate Vulnerable to Weaker German Producer Prices
In the absence of any fresh escalation in the Turkish situation the Euro to Pound Sterling (EUR/GBP) exchange rate is likely to maintain a solid footing.
As long as markets see reason to bet on the ECB taking a more hawkish approach to monetary policy the downside potential of the single currency should remain limited.
However, EUR exchange rates may come under pressure if Monday’s German producer price index data fails to impress.
Any signs of weakening inflationary pressure within the Eurozone’s powerhouse economy would leave the Euro exposed to fresh losses.
Unless inflationary pressure across the currency union shows evidence of a sustained uptick the Euro to Pound Sterling (EUR/GBP) exchange rate may struggle to hold onto any particular gains for long.