Pound to Euro Exchange Rate Forecast: Higher German Inflation Rate to Encourage ECB Hawks

Update: Moody’s Note of Brexit Caution Limits GBP/EUR Exchange Rate Momentum

As a report published by Moody’s Investors Service warned that a significant degree of uncertainty over Brexit remains, in spite of positive progress, the Pound to Euro (GBP/EUR) exchange rate lost some of its momentum.

This encouraged a few fresh jitters for the Pound (GBP), given that the Irish border issue looks set to remain a key sticking point as negotiations progress.

Even so, with forecasts pointing towards a decline in March’s raft of Eurozone confidence indexes the appeal of the Euro was also a little muted on Monday afternoon.

Hawkish BoE Fails to Extend GBP/EUR Exchange Rate Gains

While the Bank of England (BoE) appeared a little more upbeat about the economy than anticipated at its March policy meeting this failed to keep the Pound to Euro (GBP/EUR) exchange rate on a stronger footing.

Even though two policymakers voted in favour of an immediate interest rate hike, as opposed to seven votes in favour of leaving policy unchanged, the Pound (GBP) soon faltered.

In large part this was due to the strong gains GBP exchange rates had made over the course of the week, with Sterling’s upside potential temporarily limited.

As investors have already effectively priced in the impact of a May rate hike there appeared to be little scope for additional Pound gains ahead of the weekend.

Lingering uncertainty over Brexit also weighed on GBP exchange rates, with major issues still unresolved and some MPs pushing back against the joint UK-EU draft treaty.

Easing EU Trade Concerns Offer Support to Euro Exchange Rates

The announcement that the EU will be temporarily spared from US tariffs on steel and aluminium put further pressure on the GBP/EUR exchange rate.

With the prospect of a US-EU trade war looking to have diminished, confidence in the outlook of the Eurozone economy naturally improved.

A weaker US Dollar (USD) also helped to boost the appeal of the Euro (EUR) during Friday’s European session, as fears of a further deterioration in trade relations between the US and China weighed on market sentiment.

However, EUR exchange rates struggled to hold onto this stronger footing for long, even after the fourth quarter French gross domestic product was unexpectedly revised higher on Monday.

As EU officials continue to push for the exemption on metal tariffs to be made permanent the Euro could still find further support.

Higher German Inflation Forecast to Boost Hopes for Hawkish ECB Outlook

Further volatility is forecast for the GBP/EUR exchange rate in the coming days with the release of the provisional German consumer price index data for March.

Investors expect to see an acceleration of inflationary pressure, with the CPI forecast to pick up from 1.4% to 1.7% on the year.

This sort of improvement would give the European Central Bank (ECB) greater incentive to shift its monetary policy outlook, increasing the odds of a return to a tightening bias in the months ahead.

However, if inflation fails to rise as forecast the mood towards the Euro could sour significantly.

Additional support could be in store for the single currency as forecasts point towards a fresh dip in the German unemployment rate for March.

So long as the Eurozone’s powerhouse economy continues to demonstrate signs of economic resilience the GBP/EUR exchange rate is likely to remain under some degree of pressure.

GBP/EUR Exchange Rate Volatility Forecast on UK Consumer Credit Data

While UK economic data is a little thinner on the ground this week the GBP/EUR exchange rate could still see some movement on the back of Wednesday’s UK net consumer credit data.

An increase in consumer credit may encourage the Pound to push higher against its rivals once again, with higher levels of debt implying greater confidence within UK households.

Even so, as BoE policymakers have expressed some concern over the high level of domestic credit in the past a stronger showing could still dent GBP demand.

Any fresh signs of weakness within the UK economy may diminish the odds of imminent BoE policy action, to the detriment of the GBP/EUR exchange rate.

Hannah Wilson

Contact Hannah Wilson