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EUR GBP Exchange Rate Slumps on Lower ECB Rate Hike Forecasts

The Euro has closed trading down by -0.4% against the Pound this week, owing to an estimated drop in Eurozone inflation from 2% to 1.5% in March.

This has lowered the likelihood that the European Central Bank [ECB] will touch interest rates in April, especially as the ECB’s decision falls between two stages of the French election process.

[First published 10:32 March 31st, 2017]

With German unemployment falling to a historic low of 5.8% in March, the Euro has recorded marginal gains against the Pound. The positive effect has been somewhat limited, however, by the fact that the EUR GBP rate of 0.85 is around the worst in the week.

Prior Eurozone data has also limited demand for the Euro, with Thursday seeing a drop in Eurozone-wide confidence and a worse-than-expected slide in German inflation in March.

Along with Brexit jitters, the Pound has also been influenced by Q4 finalised GDP figures today. On the quarter, a forecast-matching rise has been seen, but annually a greater-than-expected drop has cancelled any positive influence.

The Euro may drop against the Pound when Eurozone inflation rate figures are released. On the year, a flash drop from 2% to 1.8% is forecast.

This outcome, combined with falling Eurozone confidence and German inflation on Thursday, is likely to weaken the Euro.

Lower inflation reduces the pressure on the European Central Bank (ECB) to raise interest rates and ‘tighten’ monetary policy, making a continuation of the status quo more likely.

Looking ahead to next week, the first major news will be Eurozone unemployment on Monday. Other notable announcements will include retail sales on Tuesday and major composite and services PMIs on Wednesday.

Rises are forecast for both Eurozone PMIs, which means the Euro could rally against the Pound if the data matches forecasts.

Next week will bring a limited spread of UK data, with the main source of movement being PMI figures for March.

As Article 50 was activated late in the month, the figures are not expected to reflect this event, making April’s PMI results more likely to show the short-term impacts of Brexit’s beginning.

The other major UK news next week will be February’s trade balance, due on Friday.

Outside of these scheduled releases, any preliminary talks in the Brexit process are likely to cause GBP movement, especially if it looks like promises of a ‘better Britain’ are being replaced with a ‘take what you can get’ attitude.

Current Interbank EUR GBP Exchange Rates

At the time of writing, the Euro to Pound (EUR GBP) exchange rate was trading at 0.85 and the Pound to Euro (GBP EUR) exchange rate was trading at 1.16.