- Pound Sterling Rallies – EU referendum opinion polls show lead for the ‘Remain’ campaign
- Euro Dives – Dovish Praet speech weighs on common currency
- ECB-Germany Relationship Frayed – Weidmann admits blurred boundaries between monetary and fiscal policy
- GBP/EUR Forecast to Trend Narrowly – Weak UK data weighs
GBP/EUR Exchange Rate Trending Narrowly as Traders Digest Weak UK Data
Although the UK Pound managed to hold gains in the immediate aftermath of weak inflation data, thanks to a supportive EU referendum opinion poll, the GBP/EUR exchange rate dropped from intraday highs to trend narrowly as traders digest the weak inflation result. Positive Eurozone trade balance data also allowed the single currency to tick higher.
Pound Sterling (GBP) Exchange Rates Cool from Intraday Highs following CPI Data
In the early stages of Tuesday’s European session the British Pound rallied versus its major peers in response to EU referendum polls showing a lead for those voting to remain in the European Union.
‘The Pound is finding buyers as polls seem to indicate the Remain vote is gaining the advantage over Leave,’ said Peter Rosenstreich of Swissquote Bank. ‘We are still cautious ahead of the vote. Unless the polls really show a decisive Stay lead, rallies in Sterling can be seen as an opportunity to sell.’
However the UK Pound declined from opening levels as the European session progressed after domestic data failed to inspire confidence in the UK’s economic outlook. Of particular disappointment was inflation data. On the year, April’s Consumer Price Index was forecast to hold at 0.5% but the result actually dropped to 0.3%. Additionally, April’s Consumer Prices dropped beyond expectations to 0.1% on the month.
A spokesperson for the Treasury said: ‘Today’s inflation figure continues the trend we’ve seen over the past year. Pay is growing faster than prices, boosting families’ spending power. It is clear Britain would be poorer outside the EU. To avoid putting our economic progress at risk we must continue with the plan that is building resilience and delivering rising living standards across Britain.’
Euro (EUR) Exchange Rates Dive following Dovish Praet, Weidmann Speeches
Although European data showed the trade surplus widened beyond expectations, the single currency softened versus nearly all of its major peers. The depreciation was initiated by a speech from European Central Bank (ECB) Chief Economist Peter Praet. Praet stated that Eurozone banks are facing a major profitability crisis.
Also weighing heavily on demand for the common unit is the ever-fraying relationship between Germany and the ECB. Germany has long been unhappy with the ECB’s policy stance, and ECB policymaker and Bundesbank Chief Jens Weidmann has been somewhat caught in the middle. However, Weidmann has conceded the risks to the central bank.
‘The vehemence of the debate perhaps also stems from some of the measures we have taken so far having blurred the boundaries between monetary and fiscal policy and having redistributed government liability risks via central bank balance sheets,’ he said, adding this had made the ECB more vulnerable to attack.
GBP/EUR Exchange Rate Forecast to Hold Gains: US Inflation to Provoke Volatility
Given the absence of further European and British ecostats, the Pound Sterling to Euro (GBP/EUR) exchange rate is likely to hold gains for the remainder of Tuesday’s European session.
However, there is potential for volatility in response to the publication of US inflation data. This is thanks to negative EUR/USD correlation. There is also the possibility that the marked Sterling uptrend will open up some attractive selling positions, causing the UK unit to depreciate as traders lock in profits.
The Pound Sterling to Euro (GBP/EUR) exchange rate was trending within the range of 1.2674 to 1.2814 during Tuesday’s European session.