Prospects For Sterling Euro Exchange Rate Uncertain Ahead Of Eurozone Summit And German CPI Inflation Data

Modified: Wednesday, 27 June 2012 12:45 BST - Written by Tim Boyer

STORY LINK Prospects For Sterling Euro Exchange Rate Uncertain Ahead Of Eurozone Summit And German CPI Inflation Data

European Union Commission President Jose Manuel Baroso heralded this Thursday’s eurozone summit as a new dawn for the troubled region in a set-piece speech yesterday afternoon. However, the market was not impressed by Baroso’s words, as investors tripped over each other to sell-off euro-denominated assets. This sent the GBP EUR exchange rate higher and by the end of yesterday’s European equities session, the pair was trading to within half a cent of its highest level since November 2008. Investors appeared wholly unconvinced by Baroso’s proposals for ‘genuine economic and monetary union’ in the region, which included a co-ordination of taxation policy between member states and greater integration between the region’s banks. However, it was the ominous warnings which peppered Baroso’s comments which struck fear into the hearts on institutional investors holding euros. The EU Commission President talked of ‘a vicious circle’ which has been established which sees taxpayers’ money being used to bailout profligate European retail banks. He went on to describe the region’s current debt crisis as ‘the biggest threat to all that we have achieved through European construction over the last 60 years’. In short, Baroso proposed no genuine new solution, whilst stoking investors’ fears regarding the potential for a fully-blown debt meltdown in the eurozone.

Meanwhile, the major risk event of note today comes this lunchtime, with the release of this month’s German CPI Inflation data. A print above the expected 1.8% level would have an uncertain effect on the single currency. On the one hand, it would make a near-term loosening of monetary policy by the European Central Bank less likely. However, recent positive actions aimed at stimulating economic activity by central banks have been well-received by investors. It appears that the negative link between a loosening of monetary policy and a currency’s prospects has been well and truly broken, so an apparently ‘bad’ print for the figure could actually prove ‘good’ for the euro.

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