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Pound Euro Exchange Rate Slides Even as Weakening Eurozone Inflation Undermines ECB Outlook

Vote Leave Controversy Adds to Pound Euro Exchange Rate Bearishness

Faltering market confidence has left the Pound to Euro (GBP/EUR) exchange rate on a weaker footing, with fresh UK data rather thin on the ground.

With the controversy surrounding the Vote Leave campaign picking up steam political concerns have continued to weigh on the appeal of the Pound (GBP).

As allegations suggest that members of the group ‘may have committed criminal offences’ in its financial dealings with data miner Cambridge Analytica this has helped to stir up fresh unease within the UK political landscape.

With just a year now left before the March 2019 deadline for the UK to leave the EU the upside potential of GBP exchange rates looks rather limited.

Weakening Eurozone Inflation Expectations Fail to Limit Pound Euro Exchange Rate Slump

Even though the latest raft of Eurozone data proved less-than-encouraging this failed to offer any particular support to the softening GBP/EUR exchange rate.

Confidence in the Euro (EUR) nevertheless faltered on Tuesday morning after the German import price index contracted further than forecast in February.

As prices dipped -0.6% on the month this suggests that inflationary pressure within the Eurozone’s powerhouse economy is still failing to build as investors and policymakers would like to see.

Further disappointment was in store for the Euro as a result of March’s raft of Eurozone confidence data, which showed a decline across the board.

Particularly concerning was a weakening in consumer inflation expectations, as Bert Colijn, Senior Eurozone Economist at ING, noted:

‘The inflation outlook came down in March as both consumers and businesses in manufacturing and services saw selling price expectations decrease. As pipeline price pressures seem to level off a bit and the economic outlook is coming down from cloud nine, there is not much in this survey that will please the ECB. Expect continued dovish talk as the summer and decision on QE approaches.’

Even so, the relative bearishness of the Pound prevented the GBP/EUR exchange rate from capitalising on this weaker showing.

With forecasts pointing towards an uptick in the German consumer price index on Thursday support for the Euro remained.

BoE Agent’s Summary Forecast to Trigger GBP/EUR Exchange Rate Movement

The GBP/EUR exchange rate may retreat further if the latest Bank of England (BoE) Agents’ summary of business conditions proves less optimistic in nature.

If the report suggests that business confidence has deteriorated further in the first quarter of the year this could give policymakers some cause for caution, potentially damaging the odds of a May interest rate hike.

However, a more upbeat message from domestic businesses may offer the Pound a fresh rallying point, even in the face of persistent Brexit-based uncertainty.

Focus will also fall on February’s net consumer credit figure, which may point towards an increased level of optimism amongst UK households.

As long as the case for a May rate hike continues to build the downside potential of the GBP/EUR exchange rate is likely to remain somewhat limited.