Euro Pound (EUR/GBP) Exchange Rate Trades Lower as Eurozone Inflation Prints Soft

February 23, 2018 - Written by David Woodsmith

STORY LINK Euro Pound (EUR/GBP) Exchange Rate Trades Lower as Eurozone Inflation Prints Soft

Eurozone Consumer Prices Slip – Euro Pound (EUR/GBP) Exchange Rates Fall

The Euro Pound (EUR/GBP) exchange rate traded lower on Friday, falling as markets responded to a round of disappointing consumer price index (CPI) prints for the bloc.

According to Eurostat, inflation in the bloc pulled even further from the European Central Bank’s (ECB) target in January, rising by 1.3% on a yearly basis, down from the previous 1.4% but consistent with forecasts.

On a monthly basis, however, inflation plummeted by -0.9%, matching the forecast but printing significantly down from the previous rise of 0.4%.

This fall was largely driven by poor readings in Cyprus, Greece, Ireland, Denmark and Spain, with Lithuania, Estonia, Romania and the UK topping out the readings above 3%.

Dennis De Jong, Managing Director at UFX shared his thoughts on the figures:

‘This morning’s inflation reading highlighted there’s still work to be done to reach the ECB’s target of 2%, after figures echoed market expectations at 1.3%. While Mario Draghi has tempered expectations of reaching the ECB’s target within the first quarter, he’ll be eager to see positive movement with the second quarter on the horizon’.

In this respect, it is now very unlikely that bank strategy will be altered for the foreseeable future – a prospect that has made the single currency the less attractive option today compared to Sterling and the US Dollar (USD).

Pound (GBP) Exchange Rates Claw Back Losses on Upbeat Credit Agricole Forecast

The Pound (GBP) clawed back some of its recent losses on Friday, bolstered by an upbeat currency forecast from bank institution Credit Agricole.

Credit Agricole pointed to the potential for Sterling to surge on the back of a hawkish Bank of England (BoE) - with optimism for a rate hike in May largely enduring yesterday’s disappointing UK GDP release.

Indeed, analysts now see an 83% chance of a rise in interest rates, a reading bolstered by steadily accelerating wage growth, elevated inflation levels and hawkish statements from various commentators.

Strategists at Credit Agricole posted a research note highlighting this optimism:

‘The outlook for the Pound could brighten in the coming weeks/ we expect upcoming UK data to corroborate investors’ expectations of a more aggressive tightening by the BoE in the next few months. Given that the rate markets are still to fully price in a May rate hike, the Pound rate advantage could grow from here’.

It should be stressed, however, that the central bank has asserted that it is looking for progress in the Brexit negotiation process as a massive factor in determining monetary policy measures.

EUR/GBP Exchange Rate Forecast: Brexit Transition Talks in the Spotlight

The Euro Pound (EUR/GBP) exchange rate will likely remain volatile next week as markets respond to demonstrated progress (or a lack thereof) in Brexit transition talks.

UK PM Theresa May and some 11 senior Ministers finished thrashing out the UK’s approach to Brexit late on Thursday in Chequers, with reports stating that the attendees were happy that ‘baby steps forwards’, had been made.

One Cabinet source stated that ‘divergence has won the day’, with recognition amongst members that the UK will not be staying within the customs union, instead achieving frictionless trade through an alternative means.

The PM is now scheduled to set out her position in a speech next week.

If said speech proves positive and provides greater clarity on the UK’s future relationship with the EU post-Brexit then UK businesses could be prompted to resume investment measures – an event that would send Sterling soaring.

If the speech simply reiterates things that have been previously said, however, then the EUR/GBP exchange rate could swing back into the single currency’s favour.

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Euro Pound Forecasts