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Pound to Euro Exchange Rate Extends Weekly Highs Despite Rising Eurozone Core Inflation

Pound to Euro Exchange Rate Higher Despite Better than Forecast Eurozone CPI

Despite the Eurozone’s latest Consumer Price Index (CPI) results beating forecasts month-on-month, the Pound to Euro (GBP/EUR) exchange rate advanced on Friday and even touched new weekly highs.

GBP/EUR has trended higher for most of the week since opening at the level of 1.1300. While the pair briefly dipped back to the week’s opening levels on Thursday, the pair touched a high of 1.1356 on Friday morning which was its best level in over a week.

Sterling (GBP) has benefitted from Euro (EUR) weakness thanks to Bank of England (BoE) speculation, mixed Eurozone data and market uncertainty ahead of a key week in European politics.

As a result, the Euro was unable to benefit from Friday’s final January Eurozone Consumer Price Index (CPI) results, which came in at -0.9% month-on-month and beat the expected -1.6%.

The yearly core inflation print also advanced from 0.9% to 1.0% as expected, though the main yearly inflation rate slipped from 1.4% to 1.3% as expected too.

Pound (GBP) Exchange Rates Benefit from Bank of England (BoE) and Brexit Speculation

Thanks to rising signs of hawkishness from Bank of England (BoE) policymakers in recent weeks, Pound investors have been increasingly confident that the bank could be preparing to hike UK interest rates again as soon as May – despite poor UK data.

This week’s UK data was largely disappointing, showing that UK unemployment unexpectedly rose towards the end of 2017. UK growth is also now projected to have been much slower in Q4 2017 than previously expected.

However, the bank has appeared confident that British data will support higher interest rates in the coming months and predicts that UK wage growth will firm. As a result, Sterling is being supported by BoE interest rate hike bets.

On top of this, the latest Brexit news has made investors more hopeful for a ‘soft Brexit’.

On Friday, reports emerged that Britain’s opposition Labour Party was planning to vote in support of an amendment from Conservative backbenchers looking to keep Britain in a customs union post-Brexit.

Euro (EUR) Strength Limited by Underwhelming Data and Political Uncertainties

A weaker Euro also made it easier for the Pound to Euro (GBP/EUR) exchange rate to advance this week. The shared currency was weighed down as Eurozone data fell short of expectations and markets became concerned about upcoming Eurozone political developments.

For example, on Wednesday the Eurozone’s PMI projections came in lower than expected in every major print, while this week’s Eurozone and German confidence figures were also largely disappointing.

Overall though, while disappointing the data still indicated that the Eurozone was still on track for strong growth in Q1 2018.

The Eurozone was also weighed down over the past week by expectations that the next few weeks could be vital in European politics.

The results of Italy’s general election will come in on the 4th of March – next weekend. On the same day, major developments on the possibility of a ‘grand coalition’ in Germany are also likely.

Pound to Euro (GBP/EUR) Exchange Rate Forecast: Major Week Ahead for Euro

While Britain’s economic calendar will be quieter next week save for confidence and manufacturing figures, Brexit and Bank of England (BoE) speculation is more likely to drive the Pound anyway.

In any case, a slew of influential Eurozone ecostats due throughout the week, as well as anticipation for upcoming Eurozone political developments, are likely to give Euro traders plenty to digest.

Tuesday will see the publication of February’s inflation projections from Spain and Germany, as well as the Eurozone’s final February confidence results.

Wednesday will follow with another slew of data, including GfK’s German consumer confidence figures, Germany’s February unemployment rate, and the Eurozone’s February inflation projections.

The inflation figures could be especially influential if they surprise investors, as stronger than expected Eurozone inflation could boost bets that the European Central Bank (ECB) may be pressured into tightening monetary policy sooner than previously expected.

Later in the week, manufacturing PMIs from Markit and the Eurozone’s January unemployment rate will be published. Euro investors will also be anticipating Italian and German political news expected on the 4th of March.