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GBP/EUR Exchange Rate Forecast to Turn Bearish on UK GDP?

  • Lowered odds of ‘Brexit’ increased appeal of Pound
  • Euro benefitted from US Dollar softness
  • Weaker German import prices predicted to dent EUR
  • GBP/EUR forecast to soften on slowed UK GDP

Decrease in ‘Brexit’ Concerns Boosted GBP/EUR Exchange Rate

Worries over the UK’s upcoming EU membership referendum declined sharply in recent days after a survey of polls suggested that there is just a 20% chance of the nation voting in favour of a ‘Brexit’. With a high-profile warning from President Barack Obama over how long a new trade deal could take to be negotiated between the US and UK, investors have been inclined to view a ‘Remain’ camp victory as more likely. Markets also seemed to take the view that recent referendum uncertainty has prompted the Pound (GBP) to be oversold, stoking a strong rally across the board.

The relative weakness of the US Dollar (USD) helped to shore up the Euro (EUR) on Tuesday, with the single currency benefitting from the negative correlation with its safe-haven rival. However, with domestic data lacking from the Eurozone this was not enough to prevent the Pound Sterling to Euro (GBP/EUR) exchange rate from extending its gains to reach a one-month best of 1.2924.

Pound Sterling (GBP) Exchange Rate to Falter as UK GDP Slows

This morning’s German GfK Consumer Confidence Survey could offer more substantial support to the Euro, providing sentiment is shown to have held steady in May. Given recent worries over the effectiveness of central banks and persistent global slowdown pressures, however, consumers may have been more inclined towards caution.

Should the latest German Import Price Index figures prove disappointing the single currency could soften, with a continued contraction in prices suggesting that inflationary pressure in the Eurozone’s powerhouse economy remains weak. As boosting inflation remains a key concern of the European Central Bank (ECB) a weaker showing here could encourage speculation of further easing measures to come from policymakers.

The Pound, meanwhile, is expected to end its bullish run on the back of the first quarter UK GDP report. Markets anticipate that growth in the domestic economy slowed at the start of the year, having been particularly hampered by ‘Brexit’ uncertainty. On the quarter GDP is forecast to have slipped from 0.6% to 0.4%, a result which is likely to further discourage the odds of the Bank of England (BoE) raising rates in the coming months.

GBP/EUR Exchange Rate Forecast: Weaker Eurozone Inflation to Soften Single Currency

Later in the week the latest German and Eurozone Consumer Price Index reports are expected to dent the appeal of the common currency. Fresh evidence of weaker inflation is anticipated, which could increase the pressure on the ECB to consider lowering interest rates further as March’s raft of measures would appear to have failed to secure the desired effect.

The UK’s GfK Consumer Confidence Survey is expected to show a continued decline in domestic sentiment, which could push the Pound lower against rivals. ‘Brexit’ speculation is also likely to remain a prominent influence on demand for Sterling, as researchers at Investec noted:

‘Risk premium for a Brexit event also seems to be pricing out of other areas such as option and rates markets, with bookmakers’ odds of a Brexit falling drastically for the first time in several weeks. Then again, historically, the Pound tends to rally across April as the new tax year begins, so perhaps we may see a new wave of selling interest from better levels come May.’