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Pound to Euro Exchange Rate Tests Highs Following Underwhelming Eurozone Inflation

Last Week’s Eurozone Inflation Data Helped Pound to Euro Exchange Rate Advance

After fluctuating for most of last week, Friday’s subdued Eurozone Consumer Price Index (CPI) data left the Pound to Euro (GBP/EUR) exchange rate more appealing.

While GBP/EUR movement was narrower when markets opened on Monday, the Pound (GBP) was able to sustain the gains it made last Friday and briefly neared last week’s high of 1.1296. Overall though, the pair continued to trade closely to the week’s opening levels of 1.1278.

The Euro (EUR) saw weaker performance towards the end of last week, as the Eurozone’s December inflation projections failed to impress.

While analysts largely expected that Eurozone inflation would slow from 1.5% to 1.4% in December, news that inflation was indeed slowing was disappointing to investors hoping it would beat expectations and pressure the European Central Bank (ECB) to take a more hawkish stance on monetary policy.

The ECB has forecast that Eurozone inflation will slow in 2018 before picking up again, but may not hit the bank’s 2.0% targets until 2020 at the earliest. This means it could be quite some time before the bank tightens monetary policy such as interest rates.

Pound (GBP) Exchange Rates Volatile Ahead of UK Cabinet Reshuffle

Last week’s UK PMIs from December did little to change the Pound outlook and political uncertainty is weighing on Pound movement so far this week.

While Markit’s UK manufacturing and construction prints fell short of expectations in December, the services figure came in higher than expected. This indicated that Britain’s economy was performing better than expected towards the end of 2017, but the 2018 outlook remains unclear.

UK Parliament has reconvened this week following the winter recess. It is expected that UK Prime Minister Theresa May will be rearranging her government cabinet for the New Year, in order to re-assert her authority following a turbulent 2017.

Many major ministers, such as Foreign Secretary Boris Johnson, are expected to keep their positions.

However, any surprise changes, particularly to the balance of soft Brexit and hard Brexit advocates in the cabinet, could affect the market’s Brexit expectations and the Pound outlook. This has left the Pound volatile on Monday morning.

Eurozone Data Continues to Impress Euro (EUR) Exchange Rate Investors

Monday saw the publication of some notable Eurozone ecostats, many of which beat expectations and made it harder for the Pound to advance against the Euro.

Eurozone consumer confidence rose from 0.0 to 0.5 in December as projected while business confidence improved from 1.49 to a better than expected 1.66.

Industrial, services and economic sentiment prints also rose in December, indicating that confidence in the Eurozone was continuing to rise overall.

The Eurozone’s November retail sales results beat expectations in both prints too. The monthly figure rose from -1.1% to 1.5% while the yearly figure jumped from 0.4% to 2.8%, beating the expected 2.2%.

Pound to Euro (GBP/EUR) Forecast: UK Political Developments in Focus

The Pound to Euro exchange rate is unlikely to see much shift in direction in the coming days unless there are any notable political developments in Britain.

Any changes to the perceived Brexit bias of the UK government or the tone the government could be taking in upcoming UK-EU Brexit trade negotiations could have an effect on the Pound outlook.

For example, if the UK government begins to indicate it is preparing for a ‘no deal’ Brexit, the Pound could slump and lose some of its recent gains.

Euro trade, on the other hand, could be influenced by Tuesday’s upcoming German trade balance results from November, as well as the Eurozone’s November unemployment rate. German growth data from 2017 will be published on Thursday.

Overall though, unless there is any concerning UK political news regarding Brexit, GBP/EUR is unlikely to weaken much as the recent Euro rally continues to slow.