January 30, 2018 - Written by Frank Davies
STORY LINK GBP EUR Exchange Rate Holds its Ground Ahead of BoE Comments
The Eurozone economy continued to impress with its fourth quarter gross domestic product data, leaving the Pound Euro (GBP EUR) exchange rate under pressure on Tuesday morning.
While the Spanish growth rate moderated somewhat its economy still performed strongly over the course of 2017, largely shrugging off the disruption of the Catalan independence crisis.
Individual data also pointed towards an improvement within the French economy, with business investment rising sharply to hit its highest level since 2011.
Altogether this painted an encouraging picture of the Eurozone outlook at the start of 2018, raising hopes that the currency union will continue to outpace its rivals over the coming months.
Even so, the downside bias of the GBP EUR exchange rate was somewhat limited as markets braced for the latest commentary from Bank of England (BoE) Governor Mark Carney.
Bullish Eurozone GDP Improves EUR Exchange Rate Outlook
Although the US Dollar has recovered some ground since the beginning of the week, driven by positive inflation data and hopes of a more hawkish Federal Reserve outlook, this has failed to significantly hamper the Euro.
As the tone of recent European Central Bank (ECB) comments has shifted towards greater optimism this has helped to support EUR exchange rates, with investors betting on the prospect of its quantitative easing program being wound down sooner rather than later.
The strength of today’s Eurozone GDP data is likely to offer policymakers further encouragement, even if some of the underlying detail of the report was not quite so bullish in nature.
Bert Colijn, Senior Economist at ING, commented:
‘The big question for 2018 is whether the stronger Euro will offset the effects of improving external demand. The high growth in Q4 means that the carry-over effect for 2018 is very favourable. We expect Eurozone GDP growth to come in at 2.4% again this year.
‘The Economic Sentiment Indicator dropped slightly in January but remains close to a 17-year high. This confirms our view of a strong start to the year although downside risks to the outlook deserve mention. Political risk like the German coalition talks and Italian elections could have a significant impact on the economic outlook, and at the same time, optimism about growth could tighten financial conditions further.
‘Still, with businesses indicating that new orders continue to increase it seems to be a safe bet that the Eurozone economy will continue to perform well in the months ahead.’
However, the mood towards the single currency could sour markedly if the Eurozone consumer price index fails to impress on Wednesday.
Any signs that inflationary pressure within the currency union is still not picking up are likely to prompt investors to sell out of the Euro, to the benefit of the GBP EUR exchange rate.
GBP EUR Exchange Rate Volatility Forecast on Carney Comments
Increased Sterling volatility is likely on the back of BoE Governor Carney’s appearance before the House of Lords Economic Affairs Committee.
Markets are hoping for some fresh insight into the Governor’s outlook on monetary policy, which could shift the odds of any imminent interest rate hike.
As analysts at TDS noted:
‘This will be his last chance to say anything substantial about the economic outlook, ahead of the pre-rate decision blackout period. His recent BBC interview sounded a touch more upbeat, which should be supported by the upside GDP surprise. And we don’t look for him to push back on GBP strength.’
If Carney proves more upbeat in tone this could see the GBP/EUR exchange rate recovering significant ground over the course of the afternoon.
However, in the wake of this morning’s disappointing uptick in net consumer credit the chances of further BoE monetary tightening remain rather questionable.
Worries over Brexit are likely to continue to limit the upside potential of GBP exchange rates in the near term, though, as significant uncertainty continues to surround its ultimate shape and outcome.
Developments as the House of Lords considers the EU withdrawal bill could well dent the Pound this week.
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TAGS: Pound Euro Forecasts