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GBP/EUR: Pound Euro Exchange Rate Rallies as UK Inflation Rate Betters Forecast

January 20, 2021 - Written by Frank Davies

GBP/EUR Exchange Rate Strengthens as UK Inflation Rises

The Pound to Euro (GBP/EUR) exchange rate picked up sharply as the headline UK inflation rate bettered forecasts for December.

As the inflation rate strengthened from 0.3% to 0.6% on the year this encouraged investors to buy back into the Pound, betting that the Bank of England (BoE) will not take any imminent policy action.

With inflation beginning to pick back up the case for future monetary loosening measures appeared to diminish, offering GBP exchange rates a solid boost across the board.

Confirmation that the Eurozone consumer price index remained trapped in negative territory, meanwhile, left the Euro on a weaker footing against many of the majors.

A general improvement in market risk appetite also helped to shore up the GBP/EUR exchange rate amid anticipation ahead of Joe Biden’s inauguration.

Dovish European Central Bank (ECB) Comments Forecast to Weigh on Euro

The mood towards the Euro could sour further on Thursday if the European Central Bank (ECB) adopts a dovish tone at its January policy announcement.

While no change in monetary policy is expected at this stage EUR exchange rates could still face selling pressure if policymakers express anxiety over the economic outlook.

Signs that the ECB expects to see limited Eurozone growth in the coming months may leave the Euro exposed to another bout of selling pressure.

On the other hand, policymakers could give EUR exchange rates a boost if they fail to take a sufficiently dovish tone.

As long as markets see reason to bet that the central bank will not act to loosen monetary policy again in the near future this may limit the risk of the Euro shedding fresh ground.

Negative UK Business Optimism Set to Weigh on GBP/EUR Exchange Rate

The GBP/EUR exchange rate may struggle to hold onto its positive footing in the wake of the first quarter UK CBI business optimism index, though.

Forecasts point towards the index falling from 0 to -8 at the start of 2021, showing the ongoing impact of the Covid-19 crisis.

Evidence that businesses are taking an increasingly pessimistic view of their prospects in the months ahead would add to existing anxiety over the underlying resilience of the UK economy.

As long as the UK appears on track to remain in a state of contraction for the near future the GBP/EUR exchange rate looks vulnerable to downside weakness.

Unless business optimism shows signs of picking up the appeal of the Pound could well diminish, especially as markets brace for the release of January’s UK manufacturing and services PMIs.
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