Below forecast data for the UK left the Euro Pound exchange rate trending 0.8% higher on Tuesday, with the EUR GBP pairing achieving a high of 0.8498. The Euro breached the 0.85 level on Wednesday ahead of the release of UK employment figures and the Eurozone’s Industrial Production stats. If the rate of UK average earnings declines as expected the Pound could extend losses against its common currency counterpart. However, a poor rate of industrial output in the Eurozone has the potential to limit EUR gains.
- Sharp fall in German exports dented Euro optimism – Signs of weakness continued to emerge from Eurozone’s powerhouse economy
- Pound softened in response to wider-than-expected trade deficit – Brexit-based worries weighed on investor confidence
- Hawkish Fed speech could dent EUR GBP exchange rate – Higher odds of imminent Fed rate hike expected to undermine Euro
- Sterling predicted to remain biased to downside ahead of BoE meeting – Less dovish minutes could prompt GBP rally
Euro Pound Exchange Rate Gains as UK Inflation Falls Short
The ZEW economic sentiment and current situation surveys for Germany may have disappointed expectations, but the Euro Pound (EUR GBP) exchange rate held previous gains thanks to sub-par UK inflation data.
The rate of consumer price pressures was shown to have increased by less-than-anticipated on the month and held at previous levels on the year.
This disappointing result seemed to increase the odds of the Bank of England (BoE) opting to lower interest rates again in the near future, a prospect that spooked investors.
The Pound accordingly weakened across the board, recording losses against the Euro, US Dollar, Australian Dollar and New Zealand Dollar.
Meanwhile, the German ZEW Current Situation survey showed a decline from 57.6 to 55.1 and the Economic Sentiment gauge held at 0.5 rather than advancing to 2.5 as expected.
The Eurozone’s Economic Sentiment measure improved from 4.6 to 5.4 in September.
(Previously updated 08:00 GMT 13/09/2016)
Ahead of the release of the UK’s latest inflation data the Euro to Pound (EUR GBP) exchange rate was trending in the region of 0.8436, little changed from the day’s opening levels. Germany’s final inflation numbers for August, which were unchanged from previous estimates, had little impact on Euro trading but Wednesday’s British CPI figures could prompt EUR GBP volatility.
While Eurozone data has continued to paint a less-than-encouraging picture the Euro to Pound exchange rate has not been kept on a downtrend for long, benefitting from the persistently bearish outlook of Sterling.
A lack of fresh UK data has left the Pound with little in the way of support at the start of the week, with investors awaiting the latest domestic inflation results.
Surprise German Export Contraction Weakened EUR GBP Exchange Rate
Confidence in the single currency (EUR) was knocked on Friday by a shockingly weak German export result for July, which contracted -2.6% on the month. This furthered the impression that the Eurozone’s powerhouse economy is not in a particularly robust state, causing July’s trade surplus to narrow sharply from 26.3 billion to 18.6 billion Euros. With Germany’s previously strong industrial sector weakening and Eurozone finance ministers expressing fresh concerns over progress on Greece’s bailout reforms there was little reason for investors to favour the common currency.
However, the mood towards the Pound (GBP) remained muted ahead of the weekend. Although July’s construction output figures pointed towards a strong rebound in the sector, in line with the recent PMIs, this was not enough to boost Sterling for long. Investors were instead disappointed to find that the UK’s trade deficit had not narrowed as far as forecast in July, reigniting concerns over the resilience of the domestic economy in the face of Brexit-based uncertainty. As a result it wasn’t long before the EUR GBP exchange rate recovered some of its lost ground, trending higher at the close of the European session.
Euro (EUR) Exchange Rates Trended Higher Despite Lack of Fresh Domestic Data
Demand for the Euro picked up further on Monday morning, continuing to make gains against rivals in spite of a general absence of data. The appeal of the single currency has remained heightened in the wake of the European Central Bank’s (ECB) September policy meeting, given that policymakers appeared less dovish than anticipated. With the possibility of further monetary easing having apparently not been discussed at the meeting the odds of the ECB taking no action in the near future strengthened substantially. As a result EUR exchange rates have remained biased to the upside, despite the jittery mood of markets.
Even so, if the pricing for an imminent Federal Reserve interest rate move begins to rise once again then the Euro is likely to be dented severely. While recent US data has not been seen to increase the impetus for the Fed to hike before the end of the year policymakers have been rather hawkish in tone. As a result the Euro is likely to see volatility in response to a speech from Fed governor Lael Brainard, who is considered to be the most dovish member of the Federal Open Market Committee (FOMC). Should Brainard make any allusions to tightening then the EUR GBP exchange rate is expected to slump sharply, with the possibility of Fed action weighing on the single currency.
EUR GBP Exchange Rate Forecast: Less Dovish BoE Meeting Could Boost Pound
A rallying point could be in store for the Pound on Tuesday, with the release of the UK Consumer Price Index for August expected to show an uptick in domestic inflationary pressure. While the Bank of England (BoE) has expressed concern that inflation could overshoot the 2% target in the near future this prospect has not especially worried markets. A higher CPI could encourage investors to buy back into Sterling, although any boost is likely to prove limited ahead of Thursday’s BoE policy meeting.
Markets could take a more optimistic view if the Monetary Policy Committee (MPC) is found to have dialled back on the intention to cut interest rates to a fresh low, though. As Derek Halpenny of MUFG notes:
‘The MPC will not draw too many conclusions at this early stage and hence we doubt the minutes will offer much in shaping monetary policy expectations going forward. We doubt the BoE will need to cut rates again as it signalled was likely on 4th August but we also see it as unlikely that the minutes will reveal any definitive conclusions on policy so soon after the action taken on 4th August.’
Current EUR, GBP Exchange Rates
At the time of writing, the Euro to Pound (EUR GBP) exchange rate was on an uptrend around 0.8476, while the Pound to Euro (GBP EUR) pairing was trending lower in the region of 1.1800.