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GBP EUR Exchange Rate Rallies as ECB Leaves Rates Unchanged, but will UK GDP Reverse Gains?

The Pound Euro (GBP EUR) exchange rate extended Wednesday’s gains yesterday following the latest policy meeting of the European Central Bank (ECB).

Unsurprisingly the bank voted to leave its current monetary policy in place, leaving its headline interest rate at a record low of 0% and its quantitative easing programme in place until at least the end of 2017.

While the Euro jumped when ECB President Mario Draghi claimed that downside risks for the Eurozone had fallen, GBP EUR quickly recovered as he said that the bank’s inflation outlook remained cautious.

As expected, Draghi made it clear that he believed that the ECB stimulus package would need to continue after Eurozone inflation fell below the Bank’s 2% target rate last month following a sharp drop in fuel prices.

In his speech Draghi said;

‘A very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up and support headline inflation in the medium-term. In terms of my criteria the (inflation) assessment hasn’t really changed.’

However Draghi appeared to be more optimistic on his outlook for the global economy as on the question of US Protectionism as he suggested that fears of a global trade war involving an increasingly isolated US had diminished.

The advance of GBP EUR was slightly slowed by the Eurozone’s latest Business Confidence figures however as they leapt to their highest levels in nearly a decade.

Confidence surged from 0.83 to 1.09 in April as optimism that the European economy is strengthening caused firms to present a more upbeat outlook for the future.

However the Pound may struggle to advance further today as the Office for National Statistics (ONS) is expected to report that the UK’s GDP slipped in the first quarter.

After showing surprising resilience following the EU referendum last year, the consequences of Brexit are expected to finally catch up with the UK economy this year, as consumers faced a sharp rise in inflation.

Economists forecast that UK economic growth will have slowed to 0.4% at the start of 2017, down from 0.7% in the previous quarter.

The uptick in prices combined with slowing wage growth is expected to have prompted household spending to plummet as families tighten their belts, with the uncertainty of Brexit also causing consumer consumption to tumble.

Ben Perkins, head of consumer research at Deloitte, said;

‘With less disposable income, consumers will have to consider whether to trade down, buy less or borrow more. Consumers are already showing signs of moving away from making major purchases and this is a trend that is likely to continue.’

The outlook for later in the year is equally gloomy as analysts forecast the inflation could rise as high as 3%, causing growth to slide even further.

Looking ahead the GBP EUR Exchange rate is also likely to be softened by the UK’s latest Consumer Confidence data, with sentiment expected to slip from -6 to -7 in April following the recent economic slowdown in Britain.

Meanwhile the Euro may strengthen today if either France or Spain’s GDP shows any sign of improvement, although economists currently forecast that growth is likely to hold steady at 0.4% and 0.7% respectively.

Current Interbank Exchange Rates

At the time of writing the GBP EUR exchange rate was trending around 1.18 and the EUR GBP exchange rate was trending around 0.84.