Pound to Euro Exchange Rate Weakens

August 12, 2021 - Written by John Cameron

STORY LINK Pound to Euro Exchange Rate Weakens

GBP/EUR Trends Lower as German Inflation Soars

The Pound Euro (GBP/EUR) exchange rate has weakened today, as a lack of UK data left GBP rudderless.

The Euro (EUR), meanwhile, has found modest support after Germany’s inflation rate hit a 28-year high.

Pound (GBP) Muted amid Lack of Data

The Pound (GBP) is somewhat subdued today as a lack of data has left Sterling vulnerable to losses.

Meanwhile, continued optimism in the UK’s battle against Covid may help mitigate any downsides, despite having waned slightly in recent days.

The UK’s falling infection rate seems to have plateaued as daily confirmed cases hover around the 25,000 mark, and a leading Covid scientist has given a mixed picture of the UK’s situation.

Professor Sir Andrew Pollard, director of the Oxford Vaccine Group, warned that herd immunity is ‘mythical’ due to the Delta variant’s ability to infect vaccinated people.

Giving evidence to the all-party parliamentary group (APPG) on coronavirus, Sir Andrew said:

‘The problem with this virus is [that it is] not measles. If 95% of people were vaccinated against measles, the virus cannot transmit in the population…

‘The Delta variant will still infect people who have been vaccinated. And that does mean that anyone who’s still unvaccinated at some point will meet the virus… and we don’t have anything that will stop that transmission.’

Yet Sir Andrew also argued that the government’s plans for booster jabs ‘should be scientifically driven’ rather than simply being done as a matter of course. He emphasised the falling hospitalisation rate and the fact that a double dose of the vaccine would continue to protect vaccinated people ‘decades from now’.

While these mixed comments may not be driving an upside in GBP, the more positive elements could be supporting Sterling against too sharp a downside.

Euro (EUR) Exchange Rates Gain on German CPI

The Euro, on the other hand, is firming despite the looming US CPI release thanks to soaring German inflation.

Germany’s inflation rate for July jumped to a 28-year high of 3.8%, matching market predictions and giving the Euro a boost.

The surge in prices was in part driven by a greater reopening of Germany’s economy as more lockdown restrictions were lifted over the summer.

However, another key factor in the sharp rise in inflation is the temporary VAT reduction last year, which was used to supress consumer prices as the pandemic hit. Economists expected inflation to jump in July as market forces compensated for last year’s cut.

Headline inflation was also pushed higher by an 11.6% surge in energy prices.

As such, the latest CPI is unlikely to affect the European Central Bank’s (ECB) monetary policy. The ECB has maintained a dovish stance during the EU’s economic recovery, preferring patience and arguing that rises in inflation are temporary. The causes behind Germany’s latest CPI seem to support that narrative.

Therefore the single currency’s upside may be capped.

GBP/EUR Exchange Rate Forecast: All Eyes on US CPI

All eyes are on the US inflation figures this afternoon which, if they overshoot expectations, could boost GBP/EUR.

US inflation is expected to ease slightly from 5.4% to 5.3%. However, inflation has risen above forecasts multiple times in recent months. If it does so again, this could put pressure on the Federal Reserve to start tapering bond purchases – especially after last week’s above-expected nonfarm payrolls report.

Such a result would likely boost the US Dollar (USD), thereby weakening the Euro through the currencies’ negative correlation.

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TAGS: Pound Euro Forecasts