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Pound Sterling to Euro (GBP/EUR) Exchange Rate Forecast to Firm as Greece Set To Dominate Sentiment

The Pound Sterling to Euro (GBP/EUR) exchange rate softened by -0.30% on Tuesday.

Greek Talks End in Failure

After the crunch talks between Greece and the Euro group ended in failure on Monday, the Euro fell steeply against the Pound Sterling and other major currencies. The Greeks said that a proposed solution to the current debt crisis was ‘unacceptable’. Hopes for a deal before Greece’s current bailout programme ends on February 26 are fading fast as neither side seems prepared to budge on the conditions.

‘Yesterday was far from a hard deadline but the way the Euro group meeting collapsed in acrimony and over a basic building block of any ultimate accommodation was pretty dismal. Now, the two sides are running down their reserves of trust more quickly that they are narrowing the gulf that separates them. The risk of a Grexit remains high at 40%,’ said a lead Eurozone analyst at the Economist Intelligence Unit.

UK Inflation at Record Low

As Tuesday’s session progressed, the Euro managed to regain some ground against the Pound after the UK currency came under pressure from the release of worse than forecast inflation data. The report released by the London based Office for National Statistics (ONS) showed that prices in the UK rose at their slowest rate on record as lower food and petrol prices combined to aid consumer-spending power.

The main consumer price index rose by just 0.3% in the first month of the year, the smallest rise since records began back in 1996. The recent drops in oil prices are thought to have provided each UK household an extra £350 in their pockets.

On a month on month basis inflation fell by -0.9% and suggests that the UK will experience a brief period of deflation over the coming months. Oil prices could begin to rally later in the year as production eases, so an extended period of deflation is unlikely.

‘We expect a brief period of deflation in the coming months but we have probably seen the full impact of lower oil prices on petrol prices, we have almost certainly not seen the full effect trickle down to other goods,’ said Paul Hollingsworth, an economist at Capital Economics.

Sentiment Surges in Germany and Eurozone

The Euro received support from data, which showed that economic sentiment in Germany surged to its highest level in 12 months. The report eased concerns over the strength of the nation’s economy.

According to the ZEW Centre for Economic Research, its index of German economic sentiment rose by 4.6 points to 53.0 this month from January’s reading of 48.4. Analysts had expected the index to improve by 6.6 points to 55.0 in February.

Seperately, the index of Eurozone sentiment also increased to an eight month high.

Despite the strong ZEW figures the Euro is forecast to remain under pressure as attention remains on the Greek situation.