The Pound Sterling to Euro (GBP/EUR) exchange rate held relatively firm last week as both the Bank of England (BoE) and the European Central Bank (ECB) signalled that policy plans had not changed in December.
Rising Price Pressures Boost Pound Sterling (GBP) Exchange Rates
Demand for the Pound improved at the start of last week’s session when UK inflation rose unexpectedly from 3.0% to 3.1% - a near-six-year high.
This was followed by an uptick in British average earnings from 2.3% to 2.5%.
Although inflation continues to outstrip wages (negative real wage growth), Sterling strengthened a little bit against the Euro on hopes that rising price pressures could prompt the BoE to tighten monetary policy sooner-than-expected.
GBP/EUR Exchange Rate Rises on Dovish ECB Bets
The BoE’s December policy statement acknowledged that progress in the Brexit talks ‘would reduce the likelihood of a disorderly Brexit’ but ultimately the central bank concluded that the economic outlook had not significantly changed since November. This neutral outlook prevented Sterling registering any notable gains.
However, the Pound managed to mount a rally later on in the day when the ECB raised GDP forecasts for the next few years but predicted that Eurozone inflation would not hit the 2.0% target until after 2020.
The dovish estimates led traders to believe that ECB policymakers would likely pursue accommodative policy for longer in order to drive price pressures back towards the target.
Brexit Progress Fails to Unlock Gains for GBP/EUR Currency Pairing
The Pound gave back most of its gains at the end of last week’s session when the EU formally confirmed that Britain had made ‘sufficient progress’ on the divorce bill to move onto future trade talks.
It seems that investors were concerned with European Commissioner Jean-Claude Juncker’s comment that the second round of talks would be ‘considerably harder than the first – and the first was very hard’.
Neutral Outlook for GBP/EUR; Brexit Developments Forecast to be Key Driver of Pound Euro Rate
With little significant data releases to look out for this week, there is every chance that GBP/EUR could trade with a neutral outlook.
The ECB’s admission that inflation in the currency bloc could undershoot for many years is likely to cap the single currency, while the muted response to Britain’s EU progress shows that Brexit uncertainty remains a key concern for Sterling traders.
Data Affecting This Week’s GBP/EUR Forecast
19th December EUR German Ifo Business Climate (DEC)
20th December GBP Carney Speaks at Parliament Hearing in London
21st December GBP PSNB ex Banking Groups (NOV)
22nd December GBP Gross Domestic Product (YoY) (3Q F)