Cooling Inflation Weighs on Euro Exchange Rates
Soft Eurozone inflation and sanguine UK service sector reports have helped Sterling rally by around half a cent versus the single currency so far in 2018.
Demand for the Pound initially dipped last week due to underwhelming December PMI prints related to the manufacturing and construction sectors.
However, with factory output accounting for around 10%, and construction making up around 7%, of total UK GDP investors were happy to buy back into the Pound when data showed that the dominant service sector, accounting for over 70% of growth, accelerated in the final month of 2017.
GBP/EUR Exchange Rate Gains on Bets ECB will Leave Interest Rates on Hold
It was a different story in the Eurozone, where private sector output came in at its highest level for almost seven years in December. The upbeat score brought the 2017 annual trend up to an 11-year high.
Falling from 1.5% to 1.4%, the currency bloc’s consumer price index is still a long way off the ECB’s 2.0% target, despite the bank’s expansive quantitative easing scheme.
Government Reshuffle Could Impact Pound to Euro Exchange Rate
There are a couple of ecostats to look out for this week at home and in the Eurozone with the potential to impact the Pound to Euro (GBP/EUR) exchange rate.
UK manufacturing production is tipped to have risen 0.3% in November, which could give Sterling a mild boost.
Eurozone unemployment is expected to have decreased from 8.8% to a near-nine-year low of 8.7%, but demand for the single currency could remain capped by the soft outlook for ECB interest rates.
There is also potential for GBP/EUR to react to an expected cabinet reshuffle from UK Prime Minister Theresa May. If there are any acrimonious exits for any of the major players then it could be seen as signs of fragility and this could drag on Sterling.
However, reports suggest that foreign, finance, interior and Brexit ministers will all keep their jobs.
The rumoured creation of a minister to update the cabinet on preparations for leaving the EU without a trade deal is likely to be seen as a positive for the Pound – in the sense that it would show the government is making contingency plans for the worst case scenario.