Weaker German GDP Failed to Shore up GBP EUR after Disappointing UK Inflation

February 14, 2017 - Written by John Cameron

STORY LINK Weaker German GDP Failed to Shore up GBP EUR after Disappointing UK Inflation

The British Pound to Euro exchange rate continued to perform poorly on Wednesday afternoon. However, the Euro was weakened during the American session by a surge of USD demand allowing GBP/EUR to hold above its worst levels.

Movement in the Pound to Euro exchange rate is likely to be quiet on Thursday due to a lack of fresh economic news from Britain or the Eurozone. Investors will likely pay close attention to the G20 finance ministers meeting due to take place in the late-week.

[Previously updated 11:00 am]

December’s UK wage growth figures proved disappointing, showing weaker growth than forecast to leave the Pound to Euro exchange rate on a weaker footing on Wednesday morning.

However, with the Greek bailout back in focus once again the Euro struggled to capitalise on the fresh weakening of the Pound, as investors remained jittery over the prospect of the deadlock over austerity measures continuing.

[Previously updated 14/02/2017]

Tuesday proved to be a volatile day of trading for the Pound to Euro (GBP EUR) exchange rate, with Sterling having come under pressure in the wake of the latest UK inflation data.

UK Inflation Rose by Less-than-Forecast in January

Investors were ultimately disappointed as the UK consumer price index failed to rise as far as forecast on the year in January, clocking in at 1.8% rather than 1.9% as expected.

This marginally more modest uptick in inflationary pressure was seen to be insufficient incentive to provoke the Bank of England (BoE) into adopting a more hawkish view on monetary policy in the near future.

With one of the Monetary Policy Committee’s hawks set to depart the Bank in the coming months the odds of the BoE raising interest rates any time soon have been seen to diminish, leaving investors with little incentive to buy the Pound.

However, as researchers at Lloyds noted:

‘Further ahead, recently announced rises to domestic energy tariffs are likely to impart some upward pressure, and we expect CPI to peak at around 3.2% in 2017 Q4. While we continue to view the overshoot relative to the 2% target as one the MPC will be willing to look through, such a relaxed approach will soon require signs of at least some deceleration in economic growth.’

EUR under Pressure after German and Eurozone GDP Figures Disappointed

There was some concern over the health of the Eurozone’s powerhouse economy on Tuesday morning after Germany’s fourth quarter GDP figures fell short of expectations, particularly as third quarter growth was also revised lower.

The mood towards the Euro deteriorated further as the corresponding Eurozone GDP figures showed a similar weakness, coupled with unexpectedly soft ZEW economic sentiment surveys for February.

Altogether this undermined the more optimistic forecasts that the European Commission had released on Monday, suggesting that the currency union is under greater pressure than initially thought.

Fresh anti-austerity protests in Athens did not encourage demand for the single currency, although this was not enough to boost the GBP EUR exchange rate out of its inflation-based slump.

GBP EUR Exchange Rate Forecast to Weaken if UK Wages Fail to Impress

Demand for Sterling could recover on Wednesday if the latest raft of UK labour market data proves encouraging, with investors likely to pay particular attention to weekly earnings figures.

However, if wage growth is found to have been underwhelming at the end of 2016 this could provoke renewed worries over the prospect of an increased squeeze on consumer spending.

Given that consumer activity has been the main source of the UK economy’s resilience in the post-referendum period any weakness here would suggest that growth could weaken in the coming months.

Even so, with the Eurozone trade surplus forecast to have narrowed on a seasonally adjusted basis from 22.7 billion to 22.0 billion the GBP EUR exchange rate could find fresh support.

Any negative developments in Greece regarding negotiations to release its next tranche of bailout funding could have a significant dampening effect on the Euro.

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