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GBP/EUR Exchange Rate Inches Ahead amid UK Inflation Release

January 16, 2018 - Written by John Cameron

UK Inflation Slides, Pound Euro (GBP/EUR) Exchange Rate Unperturbed

The Pound Euro (GBP/EUR) exchange rate inched ahead on Tuesday as markets responded to some below-forecast German inflation readings and ongoing concerns regarding the state of their ‘grand coalition’.

On the UK front, markets continue to assess the severity of construction giant Carillion’s collapse, though the market focus has now shifted to focus on the UK’s inflation readings.

According to the Office for National Statistics (ONS), the UK’s December, year-on-year inflation rate printed at 3%, down from the previous period’s 3.1% but consistent with market expectations.

The core inflation reading slipped even further however; this time from 2.7% to 2.5% and below the forecast of 2.6%.

The response to this news has been mixed.

On one hand, a drop in consumer prices effectively relieves some pressure on the British consumer, which could, in turn, provoke increased spending and foster growth.

On the other hand, investors hoping for a Bank of England (BoE) rate hike in 2018 are now slightly unsettled, as falling UK CPI could push the central bank further away from hawkish intentions.

The ultimate effect of this duality has simply been stability for GBP/EUR.

German Political Woes and Poor Inflation Figures Limit EUR Exchange Rates

Euro (EUR) exchange rates suffered on Tuesday as markets responded to Germany’s ongoing political woes and their latest consumer price index readings.

According to the statistics office Destatis, inflation in Germany slipped to 1.7% year-on-year in December, down from the previous period’s 1.8% but consistent with expectations.

This fall predominantly resulted from easing energy prices, though the prices of food and services notably increased at a faster pace.

The drop in inflation doesn’t bode well for the bloc’s largest economy (and indeed the Eurozone as a whole), with investors now even more hesitant that the European Central Bank (ECB) will move for tighter monetary policy measures in 2019.

Adding to these concerns are voices of criticism regarding coalition talks between the German Christian Democratic Union (CDU) and the Social Democrats (SDU), with prominent members of the SDU expressing distaste at the nature of the latest negotiation ‘blueprint’.

Markets are also hesitant to buy too heavily into the possibility of a grand coalition, particularly after the Berlin branch of the Social Democrats voted against the formation of a grand coalition with Angela Merkel’s CDU.

This news comes two days after the SPD branch in Saxony-Anhalt also voted against coalition negotiations, further stoking investor worries that Germany will be left without an effective government until a flash election is held.

This is pertinent because another election would prompt even more uncertainty within the bloc, thus severely limiting the upward potential of the Euro.

GBP/EUR Exchange Rate Forecast: Volatility on Eurozone Inflation Ahead

The market outlook for Wednesday’s Eurozone inflation readings is now mostly gloomy, with the headline year-on-year December figure expected to drop from 1.5% to 1.4%.

The core inflation reading is expected to remain steady at 0.9%.

Both of these readings are drastically below the ECB’s target 2% range, and whilst a rate hike is still largely off of the cards until 2019, a drop could further position the ECB as a long-term dovish entity.

This eventuality would likely curb demand for the Euro, effectively giving the GBP/EUR exchange rate even more room for growth.

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