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Pound Sterling to Euro (GBP/EUR) Exchange Rate Forecast: Volkswagen Emissions Crisis Weighing Heavily on the Single Currency

It was a turbulent week for the GBP/EUR conversion rate as the Pound (GBP) and Euro (EUR) each faced slumps on disappointing data and weakened trader demand.

Wider UK Deficit Kept the Pound (GBP) Soft as European Central Bank (ECB) Dismissed Chances of Imminent Stimulus Measures

In spite of the Pound (GBP) having started the week strong, with the GBP/EUR exchange rate striking a fresh monthly peak of 1.3888 early on Tuesday after German Producer Prices evidenced strong contraction, it was not long before less than positive domestic data turned trading more bearish. Counteracting the pointedly hawkish tilt of recent comments by several members of the Monetary Policy Committee (MPC), the UK’s Public Sector Net Borrowing figure for August proved significantly worse than forecast. Rising to 11.3 billion Pounds, instead of the more modest 8.8 billion pundits had anticipated, this indicated a decided widening of the domestic deficit and weighed heavily on Sterling throughout the rest of the week.

Although a raft of German and Eurozone PMIs came in below forecast on Wednesday the common currency (EUR) remained on a sustained bullish run, thanks in no small part to the reassurance of European Central Bank (ECB) President Mario Draghi. Draghi’s statement that local policymakers remain unconvinced of the need for the implementation of fresh monetary loosening measures at this juncture helped to hold the Euro on an uptrend against rivals in spite of this more dovish data, assuaging fears of imminent ECB intervention.

Deepening Crisis for Volkswagen and German Economy Saw the GBP/EUR Pairing Rebound from a Four-Month Low

Thursday saw the German Consumer Confidence survey print lower than expected, as both the IFO Business Climate and Expectations indexes showed decided improvement contrary to forecasts. This mixed bag of results did not initially lend any support to the GBP/EUR conversion rate, as the pairing slipped to a four-month low of 1.3507 due to the persistent lack of interest in Sterling. However, as the Volkswagen scandal built steam and malpractice accusations spread, the implication of severely worsened business confidence in the Eurozone’s major economy began to take its toll on the Euro. Consequently the GBP/EUR currency pair began to retake ground ahead of the weekend, despite the odds of a near-future Bank of England (BoE) interest rate hike having continued to dwindle.

GBP/EUR Exchange Rate Forecast: Upcoming Eurozone Inflation Data May Offer Hope for Single Currency Rally

A number of major Eurozone data releases are due for publication over the coming week, including German unemployment figures and the September Consumer Price Index for the currency union. Should inflationary data show any improvement, the single currency is likely to experience a fresh boost, particularly after the recent talking down of any potential for ECB monetary loosening measures. However, as developments continue with regards to the fiddling of emissions tests by Volkswagen and the fallout potentially spreads to other areas of the auto industry, the Euro could cede further ground with the weakening of the German powerhouse.

Manufacturing and Construction PMIs will also be released for the UK during the latter week, with the potential to shore up the Pound if they provide sufficient reassurance as to the continued recovery of the domestic economy. Shortfalls here, on the other hand, may return the GBP/EUR pairing to a downtrend if indicators suggest that the case for a BoE rate rise will elude policymakers for some time yet.