Pound Euro (GBP/EUR) Exchange Rate Looks Vulnerable Ahead of Eurozone GDP Data

Underwhelming Eurozone Data Boosted Pound Euro (GBP/EUR) Exchange Rate

Comments from European Central Bank (ECB) President Mario Draghi and the central bank’s latest Economic Bulletin offered support to the Pound to Euro (GBP/EUR) exchange rate last week.

As Draghi strived to talk down the prospect of any imminent return to tighter monetary policy the sentiment towards the Euro (EUR) naturally weakened.

This bearishness was reinforced by a particularly disappointing raft of Eurozone retail PMIs, which pointed towards an easing of consumer spending across the bloc.

A narrowing of the German trade surplus put additional pressure on EUR exchange rates, even in the wake of a much-needed breakthrough in coalition talks.

Amidst a correction in global stock markets which had the effect of driving up the value of the US Dollar there was thus little incentive to favour the Euro.

Hawkish BoE Outlook Supported Pound (GBP) Exchange Rate Uptrend

While the Bank of England (BoE) left interest rates on hold by unanimous decision at its February policy meeting the GBP/EUR exchange rate still rallied strongly on Thursday.

This was due to the more hawkish nature of the accompanying meeting minutes, and the quarterly Inflation Report.

With the bank upwardly revising its growth forecasts for 2018, this is being seen as paving the way to a potential interest rate hike in May, boosting the Pound (GBP) sharply across the board.

However, GBP exchange rates struggled to maintain this positive momentum ahead of the weekend following comments from EU chief negotiator Michel Barnier.

With Barnier waning that a Brexit transition deal is still ‘not a given’ investors were spooked, rapidly pulling back out of Sterling.

GBP/EUR Vulnerable if Weaker UK Inflation Impacts BoE Rate Hike Odds

Tuesday’s UK consumer price index data looks set to provoke fresh volatility for the GBP/EUR exchange rate, with investors keen to gauge the extent of domestic inflation.

If the headline CPI retreats back below 3% this could encourage the Pound to slump, even though it would represent a move towards the BoE’s target range.

As any weakening in price pressures could dissuade BoE policymakers from considering further monetary tightening the appeal of GBP exchange rates would likely diminish following such a result.

On the other hand, while rising inflation puts greater pressure on consumers, an uptick here would provide the BoE with further incentives to raise interest rates again in the near future.

With markets hopeful that another rate hike could be in the cards in May, despite persistent Brexit-based uncertainties, this would give the GBP/EUR exchange rate a solid rallying point.

Weak Eurozone GDP Forecast could Hit Euro (EUR) Exchange Rates

Support for the GBP/EUR exchange rate could also be in store if the fourth quarter Eurozone and Germany gross domestic product data proves weaker than hoped.

Although both the German and wider Eurozone economies look set to have ended 2017 on a strong note, comfortably outpacing rivals such as the UK, the upside potential of the Euro still appears muted.

Any marked loss of momentum in the fourth quarter could well provoke jitters for EUR exchange rates, even if the economic outlook remains undeniably strong for the year ahead.

However, another strong showing here could return the GBP/EUR exchange rate to a weaker footing, especially if progress towards the next German coalition government continues unimpeded.

Luke Trevail

Luke studied Journalism at university but quickly moved into the financial sector, initially working in retail banking before joining TorFX in 2007. As a Senior Account Manager Luke assists in overseeing the management of the company’s exposure to currency volatility. He uses his years of foreign exchange experience to produce regular news updates exploring the latest currency movements.

Contact Luke Trevail