UK Consumer Price Index Betters Estimates
While non-core UK inflation rose as anticipated from 0.1% to 0.2%, the Core Consumer Price Index unexpectedly increased from 1.2% to 1.4%, while monthly prices increased 0.1% in December despite being forecast to hold steady. The news helped to push Pound Sterling into a strong uptrend, although those gains have since been softened by the results of the ZEW Economic Sentiment Survey. The survey found that opinion on the German economy was better than forecast.
German Inflation Remains Steady, Pound (GBP) Bullish Ahead of CPI Release
The German Consumer Price Index has posted steady growth in December, showing that prices increased 0.3% year-on-year and 0.2% at an EU harmonised rate. Monthly CPI actually saw a -0.1% fall in December. The GBP/EUR exchange rate is bullish however, ahead of today’s UK inflation data.
Euro Soft as François Hollande Declares France in ‘State of Emergency’
François Hollande, President of France, has claimed that France is in a ‘state of emergency’, both in terms of its economy and its security. Hollande recently revealed plans to tackle unemployment, promising €2 billion to fund vocational training schemes, subsidise smaller businesses and boost apprenticeships. Unemployment has increased by 600,000 since Hollande took power, despite numerous initiatives to lower joblessness. There are around 3.57 million people out of work in the Eurozone’s second-largest economy, making the unemployment rate higher than the Eurozone average of 9.8% and more than double that of Germany (4.5%).
However, many have claimed the move is politically motivated, aiming to gain the support of the electorate, given that presidential elections are under 15 months away.
Positive forecasts for the UK’s economic performance in 2016 have bolstered GBP/EUR, with the common currency weakened by an ECB investigation into bad debts.
EY ITEM Club Predicts UK Growth will Accelerate in 2016: GBP/EUR Advances
Despite the turbulent start to the year caused by global events and signs of domestic weakness, the UK will post strong growth in 2016, according to a forecast by the Independent Treasury Economic Model (ITEM) Club, sponsored by Ernst & Young LLP. The body, which is the only non-government forecaster to use HM Treasury’s model of the UK economy for its predictions, claims that UK GDP will rise to 2.6% in 2016, which is 0.2% higher than the previous forecasts and 0.4% higher than the expected growth for 2015.
Inflation is predicted to remain low, after price growth of just 0.2% in December, which will make it unlikely the Bank of England (BoE) will be able to tighten monetary policy this year. However, EY ITEM Club predicts consumer spending will grow 2.8% and exports will increase.
EY ITEM Club Chief Economist Peter Spencer says the group believes that ‘While growth in world trade remains disappointing, as a result of the slowdown in emerging markets, the UK is relatively well protected. Our traditional trading markets such as the EU and US have performed better lately and should continue to do so. Along with a weaker Pound this should see exports doing well this year.’
The Pound Sterling to Euro (GBP/EUR) exchange rate is currently trading in the region of 1.3136.
Euro to Pound Sterling (EUR/GBP) Exchange Rate Softens as ECB Highlights Number of Bad Loans in the Eurozone
The European Central Bank (ECB) announced on Sunday that it was questioning multiple banks in the Eurozone about the high levels of bad debt being held as a result of non-performing loans. Debts which are unlikely to be repaid are hampering recovery, particularly in countries experiencing severe economic downturns, such as Greece, Italy, Portugal and Spain. The ECB’s Single Supervisory Mechanism (SSM), the division responsible for assessing and ensuring the stability of banking in the Eurozone, identified credit risk as the second of five key priorities for 2016 in a recent press release.
The ECB directly supervises 129 banks in the Eurozone which are deemed as ‘significant’, while overseeing the supervision of ‘less significant’ lenders and financial institutions through their country of residence’s national competent authority. According to recent estimates by the International Monetary Fund (IMF), in 2014 the Eurozone held €932 billion (£710 billion) worth of bad debt, equivalent to 9.2% of Eurozone GDP.
As a result the Euro to Pound Sterling (EUR/GBP) exchange rate is currently sliding -0.5%, trading between 0.7593 and 0.7661.
Pound Sterling to Euro (GBP/EUR) Exchange Rate Forecast: Quiet Pause Today Before Tomorrow’s Data Storm
There is little data due out for the Eurozone today, other than French bond auctions, with no data due for the UK. However, tomorrow sees a glut of releases, including Consumer Price Index figures for the UK and German CPI forecasts, Eurozone monthly inflation data and the influential ZEW Economic Sentiment Survey.
The Pound Sterling to Euro (GBP/EUR) exchange rate is currently trading between 1.3043 and 1.3165.