GBP/EUR Forecast: Pound Euro Exchange Rate Fails to Hold Momentum Ahead of ECB Comments

Update: Hopes of Greater ECB Optimism Weigh Down Pound Euro (GBP/EUR) Exchange Rate

As the initial market reaction to Bank of England (BoE) policymaker David Ramsden’s more hawkish tone eased the Pound Sterling to Euro (GBP/EUR) exchange rate failed to hold onto the morning’s momentum.

Given that doubts remain over the outlook of the UK economy, especially with Brexit-based uncertainty still far from over, investors were quick to sell out of the Pound (GBP) once again.

However, European Central Bank (ECB) President Mario Draghi’s latest appearance in Brussels could soon prompt the Euro (EUR) to return to a downtrend.

Even if data continues to support forecasts of solid Eurozone growth this will not be enough to keep EUR exchange rates on a stronger footing unless the central bank looks willing to wind down its long-running quantitative easing program

Weaker-than-Forecast Eurozone Data Boosts Pound Euro (GBP/EUR) Exchange Rate

Eurozone data proved relatively disappointing over the course of the last week, leaving the Pound Sterling to Euro (GBP/EUR) exchange rate on a stronger footing.

Although February’s raft of Eurozone manufacturing and services PMIs remained firmly in growth territory the Euro (EUR) still came under pressure, given that the figures fell short of forecast.

While German exports rose 2.7% in the fourth quarter this was not enough to shore up the Euro ahead of the weekend, with investors instead focusing on the confirmation that Eurozone inflation had dipped in January.

With the US Dollar (USD) also strengthening on the back of bets that another Federal Reserve interest rate hike is imminent, there was little support for EUR exchange rates.

Pound (GBP) Exchange Rates Push Higher on Rising BoE Rate Hike Hopes

Confidence in the Pound (GBP) picked up sharply on Monday morning thanks to the latest comments from Bank of England (BoE) Deputy Governor David Ramsden, boosting the GBP/EUR exchange rate.

Investors were encouraged to find that Ramsden’s tone had turned a little more hawkish in nature, commenting that he sees the case for interest rates to rise ‘somewhat sooner rather than somewhat later’.

This is a particularly significant development considering that Ramsden was one of the policymakers to vote against November’s interest rate hike.

With the odds of a BoE interest rate hike in May looking to have increased, the appeal of the Pound improved markedly, even as a high level of Brexit-based uncertainty persisted.

Underwhelming Eurozone Inflation Forecast to Limit EUR Exchange Rate Upside

The GBP/EUR exchange rate could still come under pressure on the back of February’s Eurozone consumer price index data.

If German inflationary pressure shows a solid rebound on the month this may help to shore up the Euro once again, at least in the short term.

Even so, as forecasts point towards another decline in the headline Eurozone inflation rate any upside potential of EUR exchange rates could prove limited this week.

As long as headline price pressures remain relatively muted the European Central Bank (ECB) is likely to maintain its dovish bias, with policymakers reluctant to bring an end to the period of loose monetary policy.

Until the central bank sees evidence that inflation is strengthening consistently on the year the prospect of any return to higher interest rates will remain distant, to the detriment of the Euro.

GBP/EUR Exchange Rate Jitters Likely Ahead of UK Consumer Credit Data

Speculation over the odds of the BoE raising interest rates again in the near term is likely to continue driving GBP/EUR exchange rate movement this week.

Thursday’s net consumer credit figure will receive particular focus, given previous concerns that BoE policymakers have expressed over increasing household reliance on credit.

If credit shows a smaller increase of £1.4 billion on the month, as forecast, this could offer investors fresh cause for confidence in the Pound.

However, while a lower level of credit growth would bode well for the resilience of the UK economy this would also offer further evidence that households are continuing to rein in their spending.

Even so, as UK economic growth has largely been supported by higher levels of consumer spending in the wake of the Brexit vote a weaker showing here could still weigh heavily on the GBP/EUR exchange rate.

Hannah Wilson

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