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Pound to Euro Exchange Rate Could End Week Higher Amid Slip in Eurozone Inflation

Eurozone Inflation Slipped in December and Pound Euro Exchange Rate Advances

Updated 16:43 GMT 05/01/2018:

After trending near its weekly lows on Friday morning, the Pound to Euro (GBP/EUR) exchange rate advanced in the afternoon and trended just above the week’s opening levels towards the end of the European session.

At the time of writing this update, the GBP/EUR interbank rate was around 1.1270.

In the end, the Euro was sold from its best levels due to market disappointment that Eurozone inflation had slowed in December as expected.

However, GBP/EUR could drop again on Monday if the Eurozone’s upcoming confidence and retail sales stats impress investors.

[Published 12:10 GMT 05/01/2018]

Despite news that Eurozone inflation slipped in December as expected, the Pound to Euro (GBP/EUR) exchange rate continued to trend below the week’s opening levels and trended within a tight range during Friday trade.

Eurozone inflation was forecast to slow from 1.5% to 1.4% year on year in December and the projection figure did indeed come in at 1.4%.

This disappointed some investors, who had hoped that higher than expected inflation in Germany would help the overall Eurozone print to avoid a slip. Instead, the figure served as a reminder that the European Central Bank (ECB) still faced challenges in stoking Eurozone price pressures.

The ECB has previously forecast that inflation in the Eurozone would slow in 2018, so the latest data disappointed investors hoping for tighter monetary policy from the bank sooner.

According to the report, energy food and alcohol price volatility was the primary cause of the slowing inflation print.

Pound (GBP) Fails to Benefit from Solid UK Services Stats

Markit published its UK December PMIs throughout the week and they were generally decent. While manufacturing fell short of expectations it was still a respectable result that indicated UK manufacturers were resilient despite the Brexit process.

Thursday’s UK services PMI appeared to be more optimistic from figures alone, as the result of 54.2 beat expectations of 54.1.

However, Markit’s report pointed out that many uncertainties remained about the services outlook, especially in regards to the Brexit process.

For example, hiring and business investment appeared to be weakening as businesses were becoming hesitant to make big moves with so many factors of the Brexit process still unclear.

According to Chris Williamson, Markit’s chief economist;

‘The likelihood is that the resilience of the economy will be increasingly tested by the prevailing uncertainty and anxiety about the future as we move in to 2018, suggesting growth will slow in the absence of greater clarity and reassurance regarding a favourable Brexit outcome.’

Euro (EUR) Exchange Rates Benefit from 2018 Outlook

While markets expect that Eurozone inflation may be too weak to support higher Eurozone interest rates any time soon, investors are still optimistic about the bloc’s economic outlook.

That has been supported by this week’s other Eurozone data, which included some better-than-expected German retail sales stats from November and some impressive French consumer confidence from December.

The Eurozone’s final December PMIs from Markit were also largely impressive and indicated that December was one of the Eurozone’s best months for growth in almost seven years.

On top of solid domestic data, the Euro (EUR) has benefitted from recent weakness in its biggest rival, the US Dollar (USD). With the general global growth outlook improving too, the ‘safe haven’ US Dollar has been less appealing which has made it easier for the Euro to continue strengthening.

Pound to Euro (GBP/EUR) Exchange Rate Forecast to Remain Volatile

As the Pound to Euro exchange rate has been volatile despite notable UK and Eurozone data in recent sessions, it’s unlikely this volatility will go away next week as the economic calendar won’t be quite as busy.

The most influential UK data due for publication over the next week will be Wednesday’s November trade balance report, which is set to come in on Wednesday. Industrial and manufacturing production data could also inspire Pound (GBP) movement slightly.

Overall though, as UK Parliament is reconvening following the winter recess it’s likely that Brexit news will re-enter the news cycle and Pound movement could become more focused on Brexit developments again.

While UK-EU trade negotiations are not set to formally begin until March, any indication on what tone the UK government will take in talks and what kind of Brexit it will aim for could influence Sterling.

As for the Euro, notable Eurozone retail sales, consumer confidence and business confidence stats will be published on Monday which could affect the shared currency. German trade data and Eurozone unemployment figures will come in on Tuesday.