- BoE voted 9-0 in favour of leaving interest rates at 0.5%
- Weak Eurozone production figures weighed on Euro
- EUR struggles to capitalise after first quarter German GDP bettered estimates
- UK inflation forecast to weaken GBP/EUR exchange rate next week
Disappointing Eurozone GDP Revision Bolstered GBP/EUR Exchange Rate
Confidence in the single currency (EUR) continued to weaken after the Eurozone’s first quarter GDP was unexpectedly revised down from 1.6% to 1.5% on the year. As the IMF reiterated its previous warnings over the potential negative impact of a ‘Brexit’ on the UK economy the Pound (GBP) extended its rally ahead of the weekend. Consequently the Pound Sterling to Euro (GBP/EUR) exchange rate trended higher in the region of 1.2722.
Pound Sterling (GBP) Exchange Rate Rallied as BoE Held Steady on Rates
While the Bank of England (BoE) did not offer any particular surprise by leaving interest rates unchanged yet again the Pound (GBP) nevertheless rallied strongly in the wake of the May policy decision. Markets were largely relieved by the fact that the vote was carried unanimously, as there had been speculation that one or even two members of the Monetary Policy Committee (MPC) might be inclined to vote for a rate cut at this juncture. Despite a downward revision of the central bank’s 2016 growth forecast the mood towards Sterling was generally positive on Thursday, with confidence boosted by the BoE’s suggestion that a vote to leave the EU could prompt a greater slowdown in growth.
Demand for the Euro (EUR) was dampened by weaker-than-expected Eurozone Industrial Production figures for March. Output dipped markedly from 1.0% to 0.2% on the year, suggesting a less robust state of growth within the domestic economy. As France’s inflation rate was also confirmed to have fallen further into negative territory at -0.2% there was little to discourage worries that the European Central Bank (ECB) may be inclined towards additional monetary loosening measures in the near future.
Euro (EUR) Struggles to Make Gains despite German Growth Bettering Forecast
Some of the bullishness faded from the Pound Sterling to Euro (GBP/EUR) exchange rate on Friday, however, as investor optimism began to wane. The appeal of the single currency was boosted by the news that the German first quarter GDP had bettered forecast, with year-on-year growth climbing strongly from 1.3% to 1.6%. This seems to bode more encouragingly for the health of the wider Eurozone economy, although the latest GDP measure for the wider currency union is not expected to see any change later this morning.
Markets’ more muted reaction to this upside surprise could be attributed to worries over the longer term outlook of the German economy, as Carsten Brzeski of ING noted:
‘Against this background of a long and strong growth performance, it does not really come as a surprise that many German policymakers have become complacent, some even big-headed, or at least not being very open for criticism or proposals to further improve the economic performance. In fact, today’s data provide new ammunition for the proponents of ‘there is no need for change’.’
GBP/EUR Exchange Rate Forecast: Weaker UK Inflation to Dent Pound
Into next week the Pound could return to bearish form with the release of the UK’s April Consumer Price Index report. Domestic inflationary pressure is forecast to have weakened on the year from 0.5% to 0.4%, a result which would encourage investors to push back their bets for the potential date of the first BoE rate hike further. With referendum uncertainty likely to only increase as the June vote draws closer the appeal of Sterling is not expected to significantly improve over the coming weeks.
Current GBP, EUR Exchange Rates
At the time of writing, the Pound Sterling to Euro (GBP/EUR) exchange rate was trending narrowly around 1.2710, while the Euro to Pound Sterling (EUR/GBP) pairing was slumped in the region of 0.7867.