Although September’s Eurozone consumer price index failed to strengthen as far as forecast this failed to dent the Euro Pound exchange rate.
Confidence in the Pound weakened markedly in the wake of an unexpected downwards revision to the finalised second quarter UK gross domestic product.
Investors were disappointed to find that the economy had lost even more momentum than initially thought, suggesting that Brexit-based uncertainty is continuing to weigh on growth.
Coupled with a sharper-than-expected uptick in net consumer credit this seemed to undermine the case for any imminent Bank of England (BoE) policy tightening.
Comments from European Commission President Jean-Claude Juncker also dampened the appeal of Sterling, as he suggested that the second phase of Brexit negotiations is unlikely to start on schedule.
This prompted the Pound to trend lower across the board ahead of the weekend, with markets still wary of the prospect of time running out on Brexit negotiations before the UK can finalise a deal.
GBP exchange rates may struggle to find a rallying point in the coming days, though, with September’s raft of UK PMIs forecast to weaken on the month.
Unless the domestic economy shows greater signs of resilience the Pound is likely to remain generally biased to the downside.
Surprise Fall in German Unemployment Boosts Euro Appeal
While there was some disappointment that Eurozone inflation had failed to accelerate from 1.5% to 1.6% on the year this was not enough to particularly weigh down the single currency.
As European Central Bank (ECB) policymakers have already demonstrated a willingness to dismiss rising inflation, citing transitory influences, this is unlikely to provoke any further dovishness.
Peter Vanden Houte, Chief Economist at ING, noted:
‘While the end of deflation gives the hawks within the Governing Council ammunition to demand a rapid extinction of quantitative easing, inflation is likely to remain below the ECB’s target for some time to come. That still pleads for caution, also taking into account that too rapid an exit from QE could push the euro exchange rate up again, exerting downward pressure on inflation.
‘October’s meeting is likely to be one of the greatest balancing acts in the ECB’s history. On the one hand it will have to announce some kind of tapering, given the increasing scarcity issues in terms of bonds to buy. At the same time it will have to try to avoid markets interpreting the announcement as overly hawkish, thereby leading to a premature tightening of financing conditions.’
Markets were also encouraged by an unexpected dip in the German unemployment rate, which fell from 5.7% to 5.6% in September.
This indicates that the Eurozone’s powerhouse economy remains in a robust state of health, diminishing concerns over the results of last Sunday’s election.
Even so, the increased sense of political uncertainty within the currency union could limit the upside potential of the EUR GBP exchange rate in the near term.
Particular volatility could stem from Catalonia’s planned independence referendum, whether Spanish police are able to prevent the vote occurring or not.
Current EUR GBP Interbank Exchange Rates
At the time of writing, the Euro Pound exchange rate was making bullish gains at 0.8824. Meanwhile, the Pound Euro exchange rate was trending lower in the region of 1.1332.