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Pound Euro Exchange Rate Loses Ground as German Economic Sentiment Jumps

January 19, 2021 - Written by Frank Davies

Pound Euro Exchange Rate Under Pressure as German Economic Sentiment Strengthens

A better-than-expected uptick in the German ZEW economic sentiment index saw the Pound to Euro (GBP/EUR) exchange rate trending lower.

While forecasts had pointed towards a reading of 60 the index instead clocked in at 61.8, suggesting that sentiment picked up significantly at the start of the year.

This encouraged a greater sense of confidence in the outlook of the Eurozone’s powerhouse economy, offering a boost to the Euro.

Although the economy remains at risk from further disruption in the face of ongoing pandemic pressures the improvement was still enough to give EUR exchange rates a solid leg up.

Even though the finalised UK labour productivity report for the third quarter saw an upward revision this failed to shore up the Pound against its rival, meanwhile.

Stronger UK Inflation Forecast to Lift Pound Exchange Rates

The appeal of the Pound could pick up on Wednesday, however, with the release of December’s UK inflation data.

Investors anticipate a solid uptick from 0.3% to 0.5% in the headline inflation rate, indicating that price pressures started to build before the end of the year.

An improvement here would give the Bank of England (BoE) less reason to consider taking further monetary loosening measures in the months ahead, to the benefit of the Pound.

On the other hand, if inflationary pressure fails to pick up as expected this could leave the GBP/EUR exchange rate exposed to downside bias.

Growing anxiety over the ongoing impact of the latest wave of Covid-19 infections may also limit demand for the Pound in the days ahead.

Euro Looks Vulnerable Ahead of European Central Bank Meeting

While December’s finalised Eurozone inflation rate looks set to confirm a negative reading this is unlikely to put any particular pressure on the Euro, meanwhile.

EUR exchange rates instead look vulnerable ahead of the European Central Bank’s (ECB) policy announcement on Thursday.

Although there is no expectation for policymakers to deliver any change in policy at this stage the nature of the accompanying commentary could provoke some Euro volatility.

Any signs that the central bank still sees a need for potential action in the coming months could weigh heavily on the Euro.

However, if policymakers take a more optimistic note on the economic outlook this may encourage investors to pile into the Euro, leaving the GBP/EUR exchange rate on the back foot.
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