We could see volatility in the Pound to Euro exchange rate this week as traders digest a collapse in German coalition talks and UK Chancellor Philip Hammond’s Autumn Budget looms.
Disappointing Inflation Weighs on Sterling
Last week saw UK CPI inflation print at a joint-five-year high of 3.0%, however, demand for Sterling slid following the report as traders had been primed for a higher score of 3.1%.
It’s believed that UK inflation could start to fall back down towards the 2.0% target in 2018 as the impact of the Pound’s post-Brexit depreciation fades from the 12-month comparison period.
If inflation does indeed start to slide then the Bank of England (BoE) will likely hold off on raising rates again anytime soon.
Talk of Improved Brexit Offer Lends Pound Sterling Support
The Pound reclaimed most of last week’s losses by the start of this week’s session thanks to speculation that the UK government is ready to offer around £40 billion to settle Britain’ Brexit divorce bill.
Chancellor Philip Hammond confirmed that the UK was ‘on the brink of making some serious movement forward in [its] negotiations with the EU.’
It remains to be seen whether European leaders would accept this offer, but if they do we could see Sterling tick higher as this would open the door to negotiating Britain’s future trading relationship with the EU.
GBP/EUR also gained some ground on Monday due to news that German coalition talks had collapsed, leaving Chancellor Angela Merkel with the choice of either calling new elections or forming a minority government.
The knee-jerk reaction in the currency markets was to sell the single currency due to the political uncertainty.
However, the story could actually end up harming the Pound because instability at home could restrict Merkel’s ability to give Britain any concessions regarding a more trade friendly Brexit deal.
Autumn Budget in Focus for GBP/EUR Traders
While third quarter UK GDP is expected to be confirmed at 0.4% this week, the main event on the calendar is Chancellor Philip Hammond’s Autumn Budget.
With government debt tipped to hit 90% of GDP next year, the Chancellor’s hand appears to be tied in terms of any radical growth-boosting policies.
However, demand for Sterling could rise if Hammond announces new measures in his budget with the potential to bolster economic output and, more importantly, boost British wage growth.
On the other hand, we could see the Pound fall against the Euro if the budget causes any controversy and puts further strain on Prime Minister Theresa May’s fragile minority government.
Data Affecting This Week’s GBP/EUR Exchange Rate Forecast
22nd November GBP U.K. Chancellor Presents Budget to Parliament
23rd November EUR Markit Eurozone Composite PMI (NOV P)
23rd November GBP Gross Domestic Product (QoQ) (3Q P)
23rd November GBP Gross Domestic Product (YoY) (3Q P)
23rd November EUR ECB Account of the Monetary Policy Meeting