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Eurozone Inflation Slips – Pound Euro (GBP/EUR) Exchange Rate Struggles to Capitalise

Euro (EUR) Exchange Rates Limited by Softer EU Inflation Figures

The Pound Euro (GBP/EUR) exchange rate traded within a narrow band on Friday, supported by news that inflation in the bloc rose at a lower rate than previously expected, but limited in light of next week’s EU Brexit summit.

According to the latest readings from Eurostat, year-on-year inflation dipped to 1.1% in February, down from 1.3% in January and below an earlier estimate that put the rate at 1.2%.

This soft result was largely driven by a below-forecast rise in the prices of processed food, alcohol and tobacco and other non-energy industrial goods.

In the same month last year the rate was at a comfortable 2%, slightly above the European Central Bank’s (ECB) target.

This is, in essence, the crux of the issue; weak inflation remains a major problem for the ECB, with the latest shift lower being another move further away from the central bank’s target.

Furthermore, ECB President Mario Draghi asserted recently that the central bank would not be ending its quantitative easing measures until price pressures climb and are sustained.

Nonetheless, this gloomy outlook was tempered, somewhat by other news that wage growth in the bloc shifted slightly higher in the 4th quarter of 2017, rising by 1.7% year-on-year, up from the previous rate of 1.6%.

This may have helped buoy the Euro by slightly negating the influence of the weak inflation result.

Pound Euro (GBP/EUR) Exchange Rate Cautious on Next Week’s EU Brexit Summit and Berkeley Statement

Despite rising against a basket of the majors, Sterling struggled to make similar gains against the Euro.

This was largely due to uncertainty regarding next week’s highly significant EU Brexit Summit, though news that the UK construction giant Berkeley (one of Britain’s biggest house-builders) is refusing to bow to government pressure to build more homes also proved a hindrance.

Berkeley cited ‘market constraints’ that are making it impossible to boost housing supply, pointing to a string of factors that included economic uncertainty, changes to the tax rules for buy-to-let landlords, the complexity of Britain’s planning system and current mortgage lending limits.

The company stated:

‘The market conditions in London and the South East are unchanged from the first half with home movers and downsizers continuing to be constrained by high transaction costs, the 4.5x income multiple limit on mortgage borrowing and prevailing economic uncertainty’.

This boded poorly for the UK’s housing crisis and UK PM Theresa May’s push to get more young people on the property ladder.

Pound Euro (GBP/EUR) Exchange Rate Forecast: UK Inflation and the Brexit EU Summit in the Spotlight

This week might’ve been a quiet one for UK data, but next week should give markets plenty to chew over.

UK Brexit Secretary David Davis is scheduled to fly to Brussels this weekend and meet with EU Chief Negotiator Michel Barnier on Monday, with Downing Street seemingly optimistic that it will be able to finally secure a deal for the proposed 2-year transition period.

Many questions remain, however, regarding ongoing impasses like the Irish border and the UK’s position in or out of a customs union with the bloc.

Indeed, these questions will likely take centre stage, with markets keen to assess if any progress has been successfully made.

If so, then Sterling could see a massive resurgence in demand, as uncertainty on the Brexit front has limited the Pound for an extended period of time.

If the impasses remain, however, then GBP/EUR could shift lower, with a lack of clarity delaying trade talks and leaving UK investors hesitant.

Beyond this, next week will feature the UK’s inflation and wage growth readings; two events that could make or break investor hopes for a rate hike from the Bank of England (BoE) in May.