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Pound Euro (GBP/EUR) Exchange Rate Rises as Eurozone’s Inflation Falls in March

March 31, 2020 - Written by John Cameron

GBP/EUR Exchange Rate Edges Higher, Eurozone ‘Coronabonds’ Divide Sparks EU Fears

The Pound to Euro (GBP/EUR) exchange rate rose by 0.7% today, with the pairing currently trading around £1.129.

The Euro (EUR) following this afternoon’s release of the Eurozone’s preliminary core inflation report for March, which fell to a worse-than-expected 1%, while headline inflation fell from 1.2% to 0.7%.

Bert Colijn, ING’s Senior Economist for the Eurozone, was downbeat in his forecasts for the bloc’s inflationary pressure, saying:

‘From here on, inflation figures should be taken with a massive pinch of salt. If you thought working with that Easter effect was tough this time last year, try getting a good sense of price developments when businesses have closed en masse. The April release will definitely require lots of creativity.’

EUR is also being increasingly compromised by divisions within the Euro-area itself, with countries particularly hit by the coronavirus – such as Italy and Spain – being affected by uncertainty over an EU fiscal solution’.

Meanwhile, northern European countries, such as Australia and Finland, are resisting the issuance of so-called ‘coronabonds’ to aid the bloc’s more vulnerable economies.

Pietro Reichlin, a professor of economics at Luiss University, Rome, commented that it ‘all hinges on guarantees at the European level to avoid a market reaction’. He also added, ‘Is the European Central Bank ready to undertake the needed purchases?’.

With increasing factions popping up within the Eurozone, the GBP/EUR exchange rate has ticked higher today as investors remain wary of the single currency as the coronavirus pandemic continues to unravel.

GBP/EUR Exchange Rate Rises Despite Stagnant UK Growth in Fourth Quarter

The Pound (GBP) edged higher against the single currency despite the UK’s GDP report for the fourth-quarter stagnating at 0%.

Rob-Kent Smith, an analyst at the Office for National Statistics (ONS), comments:

‘Growth in services was offset by a drop in construction and yet another fall in manufacturing. Household spending also saw no growth in the last three months of the year while business investment continued its recent weak path, with a decline at the end of 2019’.

However, with the UK’s growth already compromised in the final quarter of last year, the outlook for the economy following March’s coronavirus nationwide lockdown looks to even bleaker. As a result, many Sterling traders are remaining cautious as the UK’s economic situation continues to darken.

GBP investors are instead awaiting further measures from Downing Street – whether fiscal or relating to further programmes to curb the spread of the coronavirus. Any more strict measures would, however, further compromise the UK’s already fragile economy.

GBP/EUR Forecast: Could Easing Covid-19 Cases Boost the Pound?

Pound (GBP) investors will be awaiting tomorrow’s release of the UK Markit Manufacturing report for March. With the figure expected to drop into contraction territory, we could see Sterling begin to struggle against the single currency.

Euro (EUR) traders, meanwhile, will be keeping a close eye on Germany’s economic developments. Being the largest economy in the Eurozone, any signs of its manufacturing sector slumping deeper into contraction territory would prove EUR-negative.

The GBP/EUR exchange rate will remain volatile this week while markets monitor the coronavirus’ impact on both domestic and global economies. Any signs of cases easing off in the UK, however, could boost Sterling.

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