GBP EUR Exchange Rate Rallies as German Inflation Misses Forecast

May 30, 2017 - Written by Minesh Chaudhari

STORY LINK GBP EUR Exchange Rate Rallies as German Inflation Misses Forecast

Speculation over Greece and the potential reigniting of the Eurozone debt crisis encouraged the Pound Euro exchange rate to trend higher.

As German media reported that Greece could be at risk of defaulting on its next bailout repayment in July the appeal of the single currency weakened markedly, despite Greek officials rapidly rejecting the claims.
With the prospect of debt relief still a contentious issue, though, the threat of another crisis is likely to hang over the Eurozone in the coming weeks.

Markets were further discouraged by weaker-than-expected Spanish and German inflation data, which eased the pressure on the European Central Bank (ECB) to consider returning to a tightening bias this year.
Confidence in the Pound picked up, meanwhile, in spite of opinion polls continuing to point towards the Conservatives losing more of their early lead against Labour.

Although the odds of a Tory landslide seem to have narrowed the GBP EUR exchange rate has nevertheless recovered from election jitters, at least for the time being.

As investors are still somewhat reluctant to put too much stock in the opinion polls, following the failure to predict the 2015 general election, the downside bias of the Pound has been somewhat limited.

JP Morgan strategist Paul Meggyesi noted:

‘In the post-referendum world, all political developments need to be viewed through a Brexit prism and an argument can be made that a hung parliament which delivered or held out the prospect of a softer-Brexit coalition of the left-of-centre parties (Labour/Lib Dems/SNP) might actually be GBP positive.’

However, the GBP EUR exchange rate is unlikely to hold onto its recent gains as the GfK consumer confidence index is forecast to have dipped from -7 to -8 in May.

If domestic sentiment continues to weaken this could weigh heavily on the wider economy, with strong consumer spending having helped to bolster growth in the wake of the EU referendum.

A fall in mortgage approvals could also dent the Pound, with the ongoing uncertainty of Brexit likely to hamper the economic outlook for some time to come.

The Euro could remain under pressure if May’s Eurozone inflation rate also points towards an easing in inflationary pressure.

Given the generally dovish outlook of the ECB any signs that inflation is failing to hold up are likely to prompt fresh selling of the single currency, adding to expectations that the quantitative easing program will remain in place for longer.

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