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Pound Sterling to Euro (GBP/EUR) Exchange Rate Forecast to Soften as 2016 Approaches

GBP/EUR Conversion Rate Predicted to Hold Losses after UK Construction Output Slowed in October

The Pound Sterling to Euro (GBP/EUR) exchange rate declined by around -0.4% on Friday morning.

The Pound softened versus all but the commodity-correlated assets on Friday morning after domestic data produced mixed results. On a yearly basis, October’s seasonally-adjusted Construction Output accelerated by 1.0% which significantly bettered the median market forecast -1.1%. On a monthly basis, however, October’s Construction Output advanced by just 0.2% on a seasonally-adjusted basis which was well below the market consensus of 1.0% output.

The Bank of England (BoE), in conjunction with GfK, released a report today concerning consumer inflation expectations over the coming year. The report wasn’t hugely impactful, however, as consumer concerns regarding the slow pace of wage growth was offset by fewer people expecting the central bank to hike the overnight cash rate in 2016. Since the publication of the Bank of England quarterly inflation report, inflation expectations remain negative.

Nordea Bank says of UK inflation; ‘We have updated our inflation forecasts and now expect inflation to stay below 0.5% in H1 16 before moving up in H2 16. In our main scenario: CPI inflation will reach 2% towards year-end 2017 while core inflation will actually increase to above 2% at the end of our forecast horizon’.

The Pound Sterling to Euro (GBP/EUR) exchange rate is currently trending in the region of 1.3797.

EUR/GBP Conversion Rate Predicted to Hold Gains ahead of US Advance Retail Sales

The shared currency strengthened versus many of its currency competitors today after German inflation data met with expectations. November’s German Consumer Price Index met with the market consensus of 0.4% on the year and 0.1% on the month. Also supporting demand for the common currency was Italian Unemployment which declined beyond expectations in the third-quarter; dropping from 12.4% to 11.7%.

Given that the Euro and US Dollar are negatively correlated, US economic data has the potential to provoke changes for the single currency. US Advance Retail Sales and University of Michigan Confidence data is considered the most significant ecostats ahead of next week’s Federal Reserve interest rate decision. If the 80% of economists surveyed who predict the Fed will hike the cash rate are proved correct, the Euro may soften if the US Dollar reacts positively. However, if traders feel a hike has been priced-in to the US Dollar value then the single currency may not see much of a reaction to the decision. The Euro will positively surge if the Federal Open Market Committee (FOMC) opts to hold the benchmark interest rate.

The Pound Sterling to Euro (GBP/EUR) exchange rate dropped to a low of 1.3780 during Friday’s European session.

Pound Sterling to Euro (GBP/EUR) Exchange Rate Forecast to Fluctuate Ahead of FOMC Rate Decision

As mentioned above, the single currency is likely to react to US data thanks to negative correlation with the US Dollar. This, therefore, is likely to have a marked impact on the GBP/EUR exchange rate. US data is unlikely to have as big an impact on the British Pound, however, now that BoE policymakers have stated that there is ‘no mechanical link’ between central banks which means that the Monetary Policy Committee (MPC) will not be pressured into hiking rates even if the Fed hike next week.

The Pound Sterling to Euro (GBP/EUR) exchange rate climbed to a high of 1.3868 during Friday’s European session.