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Pound Euro Exchange Rate Weaker on Low UK Inflation Results

  • Pound Euro Exchange Rate Recovers to Near 1.13 – Falls from weekend’s 1.14 level on UK inflation
  • Brexit Jitters Return – Pound tumbles from weekend highs on Brexit uncertainty
  • UK Inflation Slows – Sterling slumps as BoE tightening bets fade
  • ForecastEuropean Central Bank (ECB) Meets Thursday – Euro firms in anticipation

The Pound Euro exchange rate continued to recover from its weekly lows towards the end of Wednesday’s European session, but its movement will be limited until Thursday’s key events.

The day’s biggest event will be the European Central Bank’s (ECB) monetary policy decision. Analysts are split on whether the bank will take a hawkish tone, a dovish tone, or a cautious and mixed tone.

If the ECB indicates it plans to begin to wind back its quantitative easing (QE) scheme within the foreseeable future, the Euro will see stronger demand towards the end of the week and GBP EUR could end the week near its worst levels.

Pound investors, on the other hand, will be focused on Britain’s June retail sales results on Thursday.

[Previously updated 12:55 BST 19/07/2017]

After edging away from its worst weekly levels on Tuesday afternoon, the Pound Euro exchange rate trended more flatly on Wednesday. GBP EUR currently trends close to the level of 1.13.

A lack of fresh, notable data today has left investors anticipating Thursday’s key session before making any new movements on the Pound or Euro.

The Eurozone’s May construction output results were slightly disappointing, dropping to 2.6% year-on-year. The previous figure was revised slightly higher though, from 3.2% to 3.3%. This ultimately had little effect on GBP EUR.

[Previously updated 16:57 BST 18/07/2017]

The Euro to Pound exchange rate slipped slightly from its high of 0.8897 towards the end of Tuesday’s European session, but still trended well above the level of 0.88.

ZEW’s latest Eurozone economic sentiment surveys likely prevented the Euro from holding its best levels.

Eurozone economic sentiment slipped from 37.7 to 35.6. German sentiment dropped from 18.6 to 17.5 while current conditions came in at a worse-than-expected 86.4.

Wednesday’s Euro Pound exchange rate movement could be limited amid a lack of key data due for publication, but Eurozone construction output from May could influence EUR GBP slightly as investors await Thursday’s ECB meeting.

[Previously updated 12:59 BST 18/07/2017]

After seeing limited movement on Monday, the Pound Euro exchange rate plunged on Tuesday as investors reacted to Britain’s latest inflation report. GBP EUR dropped below the level of 1.13, essentially wiping out last week’s gains.

UK inflation came in at 2.6% year-on-year in June, below the projected 2.9%. The monthly inflation rate slowed from 0.3% to 0%, missing 0.2% forecasts.

The day’s Eurozone data had little effect on Euro trade, though GBP EUR could have fallen further if ZEW’s economic sentiment surveys had met or beaten expectations rather than slowing in July.

[Published 06:00 BST 18/07/2017]

The Pound Euro exchange rate slipped on Monday as Sterling investors anticipated the second round of Brexit negotiations, set to take place this week. The Euro could firm in the coming days as investors await the July European Central Bank (ECB) decision.

GBP EUR saw big movements last week. While the pair briefly touched on a 2017 low of 1.1185 earlier in the week, the pair ultimately advanced from 1.1305 to around 1.1422.

Pound (GBP) Dips as Investors Await Further Brexit Negotiations

This week will see the resumption of formal Brexit negotiations, which analysts and officials expect will focus on the post-Brexit rights of UK citizens in the EU and EU citizens in Britain.

UK Prime Minister Theresa May has been criticised recently for her proposal for EU citizens’ rights. EU leaders have argued it was not substantial enough and left too much uncertainty.

Traders are anxious that negotiations may not go as smoothly or as quickly as previously hoped. As a result, any indication that the UK and EU could agree to a post-Brexit transition period and extend negotiations would be Pound-positive.

Analysts from Commerzbank argue that other political concerns weigh on the Pound too;

‘It seems that the British government wants to (take) major steps towards the EU in the upcoming round of negotiations… It has for example admitted by now that it would meet its financial obligations towards the EU — an auspicious beginning,

The situation remains difficult for the Pound, however, as the recent reports of domestic political quarrels in the UK show…. In the short term, it may not be a breakdown of the Brexit negotiations, but a breakdown of the British government which is the biggest risk for Sterling.’

The UK general election last month left the Conservative government in a weaker position, which has sparked speculation that all may not be well within the party.

Other analysts have argued that the biggest concerns for Pound traders are more economic than political, with recent UK data suggesting that Britain’s economy hasn’t been as resilient this year as hoped.

The primary support for the Pound in recent weeks has been speculation that the Bank of England (BoE) could be preparing to discuss whether or not to taper its quantitative easing (QE) program. However, many BoE officials maintain cautious or dovish stances, limiting the Pound’s strength.

Euro (EUR) Steady as Core Inflation Rises as Forecast

Analysts have been anxiously waiting for the European Central Bank (ECB) to gradually become more hawkish this year as deflation risks fade and slowly become replaced with reflationary pressures.

ECB officials have indicated recently that they expect inflation in the bloc to gradually continue recovering, despite weaker energy prices.

Due to these global factors, month-on-month inflation came in at 0% in June, while yearly inflation slowed to 1.3%.

The core inflation rate, on the other hand, improved as analysts and ECB officials expected. Core inflation, which focuses on domestic inflation and removes global factors like energy, rose from 0.9% to 1.1% year-on-year in June.

This boosted market hopes that Eurozone inflation was gradually becoming sturdier. This would in turn make the European Central Bank more likely to support tighter Eurozone monetary policy in the foreseeable future.

Pound Euro Forecast: UK Inflation in Focus

Tuesday will see the publication of various key UK and EU ecostats which could set the tone for Pound Euro exchange rate movement until later in the week.

June’s UK inflation stats will be published and are set to be the main event of the day for GBP EUR traders. There are many ways the inflation data could influence Sterling trade.

If UK inflation comes in even higher than the expected 2.9% year-on-year stat, speculation will flare up again that the Bank of England (BoE) is facing increasing pressure to adjust UK monetary policy.

Slower-than-expected inflation may not have a strong effect on the Pound. Investors may speculate that lower inflation could lighten Britain’s pay squeeze, which would be good for Britain’s economic outlook.

On the other hand, slow inflation could instead cause BoE tightening speculation to fade, which could weaken the Pound.

Tuesday will also see the publication of ZEW’s July economic sentiment and current conditions surveys from Germany and the Eurozone, which could give the Euro some support if they impress.

However, they are unlikely to cause any big Pound Euro losses. Investors are more likely to wait for more hawkish ECB forecasts before buying up the Euro.