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GBP/EUR at 1.25 after Strong UK Inflation Eclipsed ‘Brexit’ Concerns

  • EUR trended lower despite German inflation printing as forecast
  • UK CPI bettered expectations to shore up GBP/EUR exchange rate
  • Gap between ‘Leave’ and ‘Remain’ camps narrows to increase ‘Brexit’ uncertainty
  • Pound expected to weaken as BoE leaves interest rates unchanged

Euro (EUR) Softened as Greek Bailout Talks Put Back on Hold

Worries over the outlook of the Greek economy have been diminishing demand for the Euro (EUR) at the start of the week as the nation’s bailout review came back into focus. While creditors were reported to be making progress in talks with Greek policymakers negotiations had to be paused before any final deal was reached. This temporary halt was due to the IMF’s spring meetings in Washington, although markets did not take the news overly well. Largely this is due to worries over hefty debt repayments Greece is due to pay in the summer, which will not be possible if an agreement is not reached soon.

Although Germany’s finalised Consumer Price Index for March was confirmed to have matched the provisional figure at 0.3% on the year this did little to improve the mood towards the single currency on Tuesday. With signs of weakness across the wider Eurozone the odds of further monetary loosening from the European Central Bank (ECB) appear to be increasing, despite the recent reprimands of German Finance Minister Wolfgang Schäuble who wishes to see greater tightening.

Strengthening UK Inflation Boosted Pound Sterling (GBP) Exchange Rates

The fortunes of Pound Sterling (GBP), on the other hand, have been looking up after Tata Steel secured a buyer for some of its UK assets. Although much of the domestic steel industry remains hanging in the balance as the Indian conglomerate seeks further buyers this step forward was seen as largely positive.

Sentiment was bolstered more substantially on Tuesday morning with the release of the latest UK CPI, which proved better than forecast. Domestic inflation picked up moderately on the year in March, rising to 0.5% rather than 0.4% and encouraging talk of a nearer term interest rate hike from the Bank of England (BoE). While at least some of this improvement was attributable to the fact that higher oil prices are no longer factoring into calculations, removing the relative drag of the transport sector, this stronger showing also suggests that ‘Brexit’ uncertainty has exerted a more limited impact on the UK economy.

GBP/EUR Exchange Rate Forecast: Pound to Soften with No Change from BoE

However, the Pound Sterling to Euro (GBP/EUR) exchange rate is not expected to maintain this uptrend as the underlying nature of Pound sentiment remains relatively bearish. With polls suggesting that the gap between the ‘Leave’ and ‘Remain’ camps is continuing to narrow the prospect of a potential ‘Brexit’ is expected to temper the appeal of Sterling over coming days.

Confidence is equally predicted to weaken if the BoE takes a dovish tone in its latest meeting minutes. The likelihood remains for the Monetary Policy Committee (MPC) to maintain a unanimous vote to leave interest rates on hold, as Lee Hardman, Currency Analyst at MUFG, notes:

‘The BoE have signalled that they are comfortable to leave policy unchanged until after the EU referendum when they will be able to better assess the outlook of the UK economy.’

One batch of positive inflation data is unlikely to change the BoE’s mind, but if the UK votes to stay in the EU and domestic fundamentals improve, some analysts anticipate that rates could be adjusted before the close of the year.

Current GBP, EUR Exchange Rates

At the time of writing, the Pound Sterling to Euro (GBP/EUR) exchange rate was trending in the region of 1.2501, while the Euro to Pound Sterling (EUR/GBP) pairing was slumped around 0.8000.