GBP EUR Exchange Rate Holds Narrow Trend Ahead of German Inflation Data

December 29, 2017 - Written by David Woodsmith

STORY LINK GBP EUR Exchange Rate Holds Narrow Trend Ahead of German Inflation Data

The Pound Euro exchange rate continued to trend narrowly heading into the weekend, with trading volumes thinning as markets prepared to close for the final time in 2017.

Even after the December European Central Bank (ECB) Economic Bulletin demonstrated a more optimistic tone than expected the appeal of the single currency softened.

While policymakers maintained a confident view of Eurozone economic growth in 2018 the underlying message of the Bulletin still pointed towards a rather dovish policy bias.

As the Bulletin noted:

‘An ample degree of monetary accommodation is still needed to secure a return of inflation towards levels that are below, but close to, 2%.

‘The Governing Council assessed that the strong cyclical momentum and the significant reduction of economic slack give grounds for greater confidence that inflation will converge towards its aim.

‘At the same time, domestic price pressures remain muted overall and have yet to show convincing signs of a sustained upward trend.

‘The Governing Council’s economic assessment reflected that the euro area economic expansion continues to be solid and broad-based across countries and sectors.

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‘Financing conditions in the euro area have remained very favourable.

‘Underlying inflation is expected to rise gradually over the medium term, supported by the ECB’s monetary policy measures, the continuing economic expansion, the corresponding absorption of economic slack and rising wage growth.’

This suggests that the ECB will leave its quantitative easing program in place for some months to come, to the disappointment of investors.

However, the GBP EUR exchange rate struggled to capitalise on this less hawkish message, with the appeal of the Pound still somewhat limited.

Weaker German Inflation Forecast to Boost GBP EUR Exchange Rate

Confidence in the single currency could deteriorate further this afternoon if the German consumer price index data for December disappoints.

With the ECB particularly focusing on the subject of inflation, and its lacklustre growth in recent months, a poor showing here could boost the GBP EUR exchange rate.

Forecasts point towards a slight loss in momentum on the year, with the CPI expected to have dipped from 1.5% to 1.8%, a result which could cement the ECB’s dovish policy outlook.

On the other hand, any improvement in the domestic inflationary outlook may encourage the Euro to return to a stronger footing and end 2017 on a bullish note.

GBP Exchange Rates Soften as TUC Forecasts Weak UK Wage Growth in 2018

Demand for the Pound was dented on Friday morning by a report from the TUC, which forecast that the UK will see the weakest wage growth of the 32 Organisation for Economic Co-operation and Development (OECD) nations in 2018.

The TUC expects the UK to post more negative wage growth over the course of the year, with businesses unlikely to take a more confident stance in the shadow of Brexit.

Falling real wages are likely to put further pressure on household finances, limiting consumer spending and dragging on wider economic growth as a result.

Even if consumers continue to turn towards a greater reliance on credit this is unlikely to ease the mind of the Bank of England (BoE), which has already expressed concern on the subject.

Unless inflation shows signs of weakening the BoE could be forced to raise interest rates again, something which markets are concerned the UK economy may struggle to handle.

Analysts at TDS expected the BoE to deliver another rate hike in May, commenting:

‘Beyond that, the MPC is likely to continue on a very slow hike path, pausing for one year as Brexit negotiations hit the home stretch. We expect two hikes in 2019. Our forecast is conditioned on continued slow pass-through from the weaker currency to inflation, lower trend supply growth amid decent demand growth, a labour market operating near capacity resulting in wage gains, and a transitional Brexit deal agreed in Q1 that helps lift some uncertainty on households and firms.’

However, next week’s raft of UK PMIs could offer the GBP EUR exchange rate a rallying point if domestic activity shows fresh signs of improvement.

Particular focus will fall on the services PMI, given that this sector accounts for the majority of UK economic activity, with a stronger showing here likely to boost the Pound sharply.

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TAGS: Pound Euro Forecasts