Pound Sterling to Euro Exchange Rate Forecast: Europe Inflation Could Send GBP/EUR Near 12 Month High

Modified: Tuesday, 7 January 2014 15:34 BST - Written by John Cameron

STORY LINK Pound Sterling to Euro Exchange Rate Forecast: Europe Inflation Could Send GBP/EUR Near 12 Month High

This morning’s eurozone inflation figures provided further grounds for pessimism for investors holding euro-denominated assets. The data from continental Europe revealed that the core rate of price rises had slumped to a lowly 0.7% last month – down from November’s showing of 0.9%.

The dramatic downshift in the level of inflation in the eurozone during recent months suggests that the possibility of a damaging bout of deflation, (or a generalised falling of retail prices), remains a distinct possibility for the region during 2014. The attendant increase in the real value of Europe’s national debt has the potential to deepen the economic problems which have been prevalent in Europe for the past five years.

Deflation is an economic situation which central bankers will go to great lengths to avoid, (consider Japan’s recent bout of Abenomics – a flooding of the Asian nation’s economy with easy money in an attempt to re-inflate prices). Federal Reserve policymakers in the States have similarly championed the US Quantitative Easing programme during recent years in an effort to avoid the detrimental effects of a bout of falling prices.

The European Central Bank is similarly averse to any such drop-off in prices and is likely to respond to this morning’s CPI figures by announcing its own version of asset purchase sooner rather than later. Today’s numbers are also likely to cause ECB President Mario Draghi to rehearse his well-worn mantra that his bank has the ability to cut interest rates from their current record low of 0.25% and is still actively considering carrying out such an action.

The upshot of today’s development is likely to cause institutional investors to become increasingly reluctant to hold euro-denominated assets. The pressure which this places on the single currency has the potential to send the Pound euro exchange rate (GBP/EUR) up towards its 12-month high of 1.2118 sooner rather than later.

Key Pound & Euro Exchange Rates (As of: 07/1/2014 16:00 GMT)

The Pound Sterling to Euro exchange rate is trading up +0.08% at 1.20520 GBP/EUR.
The Pound Sterling to US Dollar exchange rate is trading down -0.11% at 1.63952 GBP/USD.
The US Dollar to Euro exchange rate is trading up +0.19% at 0.73509 USD/EUR.
The Euro to Pound Sterling exchange rate is trading down -0.08% at 0.82974 EUR/GBP.

The Euro to US Dollar exchange rate is trading down -0.19% at 1.36037 EUR/USD.
The Euro to Australian Dollar exchange rate is trading up +0.47% at 1.52710 EUR/AUD.
The Euro to Canadian Dollar exchange rate is trading up +0.66% at 1.46281 EUR/CAD.

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