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Euro Pound (EUR/GBP) Exchange Rate Continues Fall as Eurozone Inflation Disappoints

May 16, 2018 - Written by John Cameron

Easing Eurozone CPI Leaves Bad Taste in the Mouth – Euro (EUR) Exchange Rates come under Pressure

The Euro Pound (EUR/GBP) exchange rate extended its fall on Wednesday as markets responded to a disappointing descent in Euro area inflation.

According to Eurostat, consumer prices in the bloc increased by 1.2% year-on-year, down from the previous period’s score of 1.3% but on par with expectations.

The monthly reading also disappointed by printing at a measly 0.3% - far below the previous month’s score of 1.0%

This news, whilst expected, put greater pressure on the single currency because it could prevent the European Central Bank (ECB) from winding down their bond-buying scheme later this year.

There are some, however, who predicted that inflation will make a sharp recovery in the coming months.

Pantheon Macroeconomics, for instance, has posited that headline inflation will rise on the back of a rebound in the core rate, a rise in energy inflation due to surging oil prices and improving employment.

The group stated:

‘The trend in unemployment continues to signal a gradual increase in core inflation. We still think the ECB is on track to end QE later this year’.

In the meantime, however, optimism seemed to have diminished.

Brexit Negotiations Leave the Pound (GBP) Exchange Rates Trading Sideways

For Sterling (GBP), a quiet data day has shifted the market focus back to Brexit negotiations, with investors worried that talks will continue to fail on both the customs union and the Irish border.

Whilst the transition period did alleviate some market anxieties, concerns remain regarding the possibility that the UK will be beholden to the jurisdiction of the European Court of Justice, whilst also being forced into compliance with the bloc’s freedom of movement laws.

To frustrate matters, the Scottish Parliament has voted against UK Prime Minister Theresa May’s latest Brexit legislation.

This has put the Prime Minister in a slightly problematic position, as she may be forced to ignore their wishes for more concessions and simply move ahead regardless.

Combined, Brexit negotiation concerns continued to weigh on the Pound, limiting its lead over the Euro on Wednesday.

Euro Pound (EUR/GBP) Exchange Rate Forecast: UK Inflation and GDP Growth due next Week

Next week will feature the UK’s highly significant consumer price inflation and GDP growth reading figures - due Wednesday and Friday respectively.

Investors will be keen to assess this month’s inflation result after the previous reading saw a surprising contraction and massively curbed Bank of England (BoE) plans for a rate rise in May.

If this fall continues then we could see hawkish policy postponed even longer, an outlook that could give EUR/GBP even more space to climb.
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