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Firm Growth and Falling Joblessness Cannot Save EUR GBP from Declining on Inflation Slowdown

Weakness in the latest Eurozone consumer price index has overshadowed positive GDP figures and pushed the Euro to Pound Sterling exchange rate lower today.

EUR/GBP exchange rate is currently down -0.4% to 0.8784.

Fastest Eurozone GDP Growth since 2011, but Inflation Weakness Softens Euro Exchange Rates

Positive Eurozone unemployment and gross domestic product figures released this morning have failed to support the Euro.

Third-quarter growth data for France started today’s data docket on a positive note after showing an above forecast 2.2% rise in annualised growth on the quarter.

Eurozone growth figures also defied economists’ expectations; printing at 0.6% meant growth on the quarter technically slowed, but this was only because the previous quarter’s figure was retrospectively upgraded to 0.7%. Analysts had expected growth of 0.5% on a seasonally-adjusted basis.

This meant year-on-year growth rose to 2.5% from 2.3%, instead of to the forecast 2.4%.

This marks the fastest growth rate in six years for the currency bloc, showing that the economy’s recovery from the sovereign debt crisis continues to firm.

In yet more positive news, the Eurozone’s unemployment rate dropped below 9% for the first time since 2009.

Yet all of this has been undermined by the fact that inflation has been revealed to have slowed during October.

On the year, overall price growth has weakened from 1.5% to 1.4%, but even more troubling is the fact that core inflation has dropped from 1.1% to 0.9%.

This is particularly concerning for the markets, given that the European Central Bank (ECB) has only just begun tapering its quantitative easing programme and was very clear that it could restore asset purchases in full if the economy appears to be struggling now that monthly bond purchases have been reduced to €30 billion from €60 billion.

Pound Sterling Remains Solid as Markets Eye ‘Super Thursday’ Monetary Policy Announcements

Excitement ahead of Thursday’s Bank of England (BoE) monetary policy announcements and Inflation Report continues to support the Pound today.

The markets have become less optimistic regarding the long-term outlook for policy, following a string of disappointing data releases which suggest the UK economy is unlikely to strengthen any time soon, but there are still high hopes that this meeting will see interest rates hiked for the first time in over 10 years.

A 0.25% hike to the base rate would take borrowing costs back up to the pre-referendum levels of 0.5%.

Bloomberg’s Daniel Moss explains that, having signalled an interest rate was incoming many months ago, the Bank of England is compelled to act:

‘The need for follow-through isn’t entirely about what the data says. It’s about a plank of central bank practice known as forward guidance.’

‘The idea is that by being more open and predictable about the direction of interest rates, officials can guide investors and companies about policy and thereby reduce volatility and the chances of an upset when rates go up or down. This, in turn, is supposed to minimize disruption to the economy.’

This prospect is giving the Pound a boost, despite data today that has shown consumer confidence in the UK is once again weakening.

The latest survey index from GfK has fallen from -9 to -10 as expected.

US and UK Data to Cause EUR/GBP Exchange Rate Turbulence ahead of ‘Super Thursday’?

There is little of interest scheduled for release from the Eurozone tomorrow, but key data from the United Kingdom, as well as the United States, could create volatility for the common currency anyway.

Markets may tear their focus away from the upcoming Monetary Policy Committee (MPC) announcements in order to analyse the October UK Markit Manufacturing PMI.

The cycle of these key business surveys begins again with the manufacturing index, with the key services measure rounding off the week on Friday.

As these will give a picture of the UK economy at the start of the final quarter of the year, markets may be inclined to pay attention to them, even when the Bank of England is dominating the economic calendar.

Thanks to the inverse correlation between the Euro and US Dollar, EUR GBP exchange rates could experience turbulence thanks to the latest Federal Open Market Committee (FOMC) announcements tomorrow evening.

If the Fed signals that December’s policy meeting is likely to see interest rates hiked, the Euro could tumble against the Pound.