Pound Euro (GBP/EUR) Exchange Rate Softens on German Coalition News
News that German Chancellor Angela Merkel’s CDU and the Social Democrats have reached a preliminary agreement for a new ‘grand coalition’ has put the Pound to Euro (GBP/EUR) exchange rate under fresh pressure.
While there is still some way to go before the coalition is finalised, the news offered markets some much-needed encouragement, easing the sense of uncertainty that has been hanging over the German economy.
The details of the agreement proved particularly encouraging for Euro (EUR) exchange rates, with the two parties committing to a greater push towards European integration.
If Germany does ultimately follow through on the pledges written into this preliminary agreement, confidence in the outlook of the EU, and the Eurozone economy is likely to strengthen further.
The US Dollar (USD) continues to fall out of favour with traders on mixed domestic data, further bolstering the general mood of EUR investors.
Optimistic Brexit Reports Boost Pound Sterling (GBP) Exchange Rates
Despite the positive Euro sentiment, the GBP/EUR exchange rate found some support on the back of reports that Dutch and Spanish finance ministers had agreed to push for a softer Brexit deal.
This suggested sentiment within some EU nations could be softening, boosting hopes that the UK could achieve a more favourable Brexit deal.
However, when these reports were downplayed the Pound (GBP) struggled to hold onto its gains for long, with the ultimate outcome of negotiations remaining far from clear.
Today, a slight uptick in the Rightmove house price index failed to galvanise additional demand for Sterling, leaving the GBP/EUR exchange rate on a renewed downtrend.
Weaker UK Inflation Forecast to Limit GBP/EUR Exchange Rate
Further downside pressure could be in store for the GBP/EUR exchange rate if December’s UK consumer price index dips in line with forecasts.
While an easing in inflationary pressure would be welcomed by UK consumers, any dip could weigh heavily on the Pound, giving Bank of England (BoE) policymakers less cause for hawkishness.
Even if annual inflation falls back to 3% this is unlikely to ease the ongoing wage squeeze, giving investors little incentive to buy back into Sterling.
On the other hand, if the CPI continues to run far above the BoE’s target range this is likely to increase the odds of it raising interest rates again in the near future.
The prospect of another interest rate hike would likely see the GBP/EUR exchange rate rally, especially if BoE policymakers adopt a more hawkish tone.
Euro (EUR) Exchange Rate Volatility Forecast on ECB Policy Speculation
No change is forecast for the finalised German and Eurozone consumer price index data, reducing the likelihood of GBP/EUR exchange rate volatility.
With inflation expected to hold well below the European Central Bank’s (ECB) target, the single currency is unlikely to find particular support.
Investors remain keen to hear from ECB speakers over the coming week, seeking any clues as to its policy outlook.
If there are signs of a greater push towards winding down the ECB’s long-running quantitative easing programme, this could encourage the Euro to make fresh gains.
On the other hand, any renewed show of caution may see the GBP/EUR exchange rate push higher once again.