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Pound Euro (GBP/EUR) Exchange Rate Struggles to Find Support Despite Stronger UK GDP

Improved UK GDP Data Failed to Boost the Pound Euro (GBP/EUR) Exchange Rate

Better-than-expected UK gross domestic product data helped to boost the Pound to Euro (GBP/EUR) exchange rate somewhat ahead of the weekend, in spite of the persistent bullishness of the single currency.

While forecasts had pointed towards a steady reading of 0.4% on the quarter growth instead picked up to 0.5% in the fourth quarter.

This suggests that the UK economy managed to gain some momentum at the end of 2017, improving confidence in the prospect of a stronger year in 2018.

Even so, as a significant degree of Brexit-based uncertainty persists the domestic economy still faces potentially major headwinds in the coming months.

As a result, the GBP/EUR exchange rate struggled to find any particularly strong momentum on the back of the GDP data, with the general mood towards the Pound (GBP) remaining somewhat muted.

ECB Optimism Encourages Euro (EUR) Exchange Rate Bullishness

Confidence in the Euro (EUR) remained relatively buoyant on Friday, maintaining pressure on the GBP/EUR exchange rate.

Investors piled back into the single currency in the wake of yesterday’s European Central Bank (ECB) policy meeting and press conference.

Although the central bank elected to leave monetary policy unchanged for another month the Euro surged higher in response to comments from ECB President Mario Draghi.

Draghi’s rather optimistic tone with regards to the inflationary outlook boosted EUR exchange rates, prompting speculation that the ECB may wind down its quantitative easing program sooner rather than later.

Even so, as analysts at Rabobank commented:

‘Taking the moral high ground, he explicitly reminded “someone else” (i.e. U.S. Treasury Secretary Mnuchin) of the international pledges to avoid competitive devaluations. Even though this may fall on deaf ears, it is a clear signal that the ECB doesn’t want to be dragged into a currency war. However, judging by today’s market reaction we would not be surprised at all to see some ECB sources coming out in the next few days with stronger language to limit the exchange rate’s upward potential.’

GBP/EUR Exchange Rate Rally Forecast on Eurozone GDP and German Inflation Data

However, the GBP/EUR exchange rate could soon find a rallying point if the latest raft of Eurozone gross domestic product data fails to impress.

Any signs of a loss of momentum within the currency union’s economy could see the Euro return to a weaker footing, with softer growth giving the ECB incentive to remain on hold for longer.

Attention will also fall on January’s German consumer price index, which may show inflationary pressure within the Eurozone’s powerhouse economy faltering.

Given the ECB’s focus on returning inflation to its 2% target range a weak showing here could serve to undo much of the optimism seen in the wake of Thursday’s policy meeting.

This would give the GBP/EUR exchange rate opportunity to regain some of its lost ground, especially if the US Dollar (USD) recovers from its latest bout of softness.