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Euro to Pound Exchange Rate Holds Ground Despite Slowing Eurozone Inflation

December 17, 2018 - Written by Tim Boyer

The Euro to British Pound (EUR/GBP) exchange rate held its ground on Monday, despite the latest Eurozone data falling short of expectations and hinting that the European Central Bank (ECB) was right to take a more dovish tone last week. Lasting Brexit uncertainties made it easier for the Euro to avoid losses versus the Pound.

Brexit uncertainties have only worsened as 2018 draws to an end and this helped EUR/GBP to advance last week despite concerns of slowing Eurozone economic activity. EUR/GBP opened last week at the level of 0.8947 and briefly touched on a three month high of 0.9082 before closing the week at around 0.8982. The pair trended nearer the level of 0.8990 on Monday.

Euro (EUR) Exchange Rates Lack Drive as Eurozone Data Falls Short of Forecasts

The Euro edged higher versus the Pound for most of Monday’s session, but was unable to capitalise on Sterling weakness as the latest Eurozone news continued to fall short of market expectations.

Monday saw the publication of the Eurozone’s final November Consumer Price Index (CPI) inflation rate results.

While the core yearly inflation rate met expectations and slowed from 1.1% to 1.0%, the overall yearly inflation rate slowed from 2.2% to 1.9% rather than the expected 2.0%.

The Eurozone’s month-on-month inflation rate contracted from 0.2% to -0.2% in November, as expected.

The data indicated that the European Central Bank (ECB) was right to take a more cautious tone on Eurozone inflation and the bloc’s economic outlook during its policy decision last week.

It also followed last week’s Eurozone PMI projections for December from Markit, which indicated to investors that the Eurozone’s economic activity was weakening even more than expected.

However, despite further signs of weaker economic activity and data in the Eurozone, the Euro did find some political support on Monday as reports suggested that Italy had agreed to the contents of a new set of budget proposals it will propose to the EU.

News that Italy’s coalition government has been making concessions on its budget plans in order to avoid disciplinary measures from the EU made investors more optimistic that Italy-EU tensions would not worsen.

Pound (GBP) Exchange Rates Remain Unappealing as Building Brexit Uncertainties Persist

The Pound was unable to advance versus a weak Euro on Monday, as markets remained hesitant to buy the British currency amid persistent Brexit jitters.

Following a turbulent week for Brexit developments and the UK government last week, Monday saw yet further Brexit developments that did not offer markets much certainty on how exactly the Brexit process will unfold.

Last week, UK Prime Minister Theresa May announced she would delay a UK Parliament vote on her negotiated UK-EU withdrawal deal in order to attempt to secure more assurances from the EU.

On Monday, May announced that UK Parliament’s debate on the Brexit plan will resume on the 7th of January, with a formal Brexit vote following the week of the 14th.

The news was slightly reassuring to investors, but fears that the withdrawal deal remained too unpopular to pass persisted.

UK Prime Minister May has also ruled out the possibility of a second EU referendum being used to break the deadlock, while the UK government has indicated it will ramp up preparation for a possible ‘no-deal Brexit’.

This worsened market concerns that a worst-case scenario ‘no-deal Brexit’ was still possible and limited Pound demand.

EUR/GBP Exchange Rate Forecast: German Business Confidence and Brexit Development in Focus

As UK Prime Minister Theresa May has announced that her Brexit deal won’t return to UK Parliament vote until January, the Pound may remain volatile as markets do not expect much major clarity on the Brexit process in the coming weeks.

Still, amid a lack of notable UK data due to be published on Tuesday, market focus is likely to remain on developments in UK political and Brexit news regardless.

The Euro is more likely to drive the Euro to Pound exchange rate instead, with Ifo’s German business confidence survey results from December due for publication.

Any new developments in Italy-EU budget tensions, as well as political developments in France, may also influence the Euro to Pound exchange rate tomorrow.
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