Pound to Euro Exchange Rate Forecast: Further Weakness in Store on Higher German Inflation

Update: Euro Exchange Rate Boost in Store if German Inflation Rises as Forecast

Further losses could be in store for the Pound to Euro (GBP/EUR) exchange rate ahead of the bank holiday weekend if March’s German consumer price index strengthens as forecast.

Forecasts point towards a solid acceleration in inflationary pressure from 1.4% to 1.7% on the year, something which could give the European Central Bank (ECB) greater cause for confidence.

On the other hand, if the headline figure fails to improve as anticipated this could offer the GBP/EUR exchange rate a rallying point as the Euro (EUR) falls out of favour.

Signs of Weakness in UK Housing Market Weigh on Pound Euro Exchange Rate

Although the GfK consumer confidence index for March showed an unexpected improvement in UK sentiment this was not enough to push the Pound to Euro (GBP/EUR) exchange rate higher ahead of the weekend.

Investors were more concerned by the latest Nationwide house price index, which showed its second monthly decline in a row.

This did not encourage much confidence in the outlook of the UK economy, with the annual rate of house price growth now at its lowest level since June 2013.

With little over a year now left until the Brexit deadline of March 2019 markets are naturally somewhat jittery over signs that the domestic economy is struggling to keep momentum going.

Confirmation that the gross domestic product (GDP) growth dipped to 0.4% on the quarter at the end of 2017 helped to keep the Pound (GBP) under pressure today.

Falling German Unemployment Rate Fails to Boost Euro Demand

Confidence in the Euro (EUR), meanwhile, picked up on the back of the continued tightening of the German labour market, adding to the downside of the GBP/EUR exchange rate.

As the unemployment rate stood at 3.5% in March, the lowest rate since September 1980, this encouraged investors to favour the single currency.

However, the strength of EUR exchange rates was still limited on Thursday thanks to the relative bullishness of the US Dollar (USD).

A better-than-forecast upward revision to the annualised fourth quarter US gross domestic product helped to encourage bets that the Federal Reserve will adopt a more aggressive approach to monetary tightening in the coming year.

Given the negative correlation of the EUR/USD exchange rate this left the Euro somewhat lacking in support, although this was not enough to benefit the bearish Pound.

Robust UK PMIs Could Limit Pound Euro Exchange Rate Downside

The GBP/EUR exchange rate could come under further pressure in the coming week if March’s raft of UK PMIs fail to encourage any particular positivity.

Any fresh signs of slowing economic activity would give the Pound fresh cause for concern, especially if the services PMI weakens on the month.

Even so, forecasts point towards the manufacturing, construction and services PMIs all remaining comfortably above the neutral baseline of 50 that divides sector expansion from contraction.

As long as the UK economy can continue to demonstrate some degree of resilience in the face of ongoing Brexit-based uncertainty the downside bias of GBP exchange rates is likely to remain limited.

Stronger Eurozone Inflation Forecast to Boost EUR Exchange Rates and ECB Optimism

Focus will also fall on the latest Eurozone consumer price index data, leaving the GBP/EUR exchange rate vulnerable to additional weakness.

With a modest uptick in the core headline figure forecast the Euro could rally strongly on Wednesday, as hopes of greater European Central Bank (ECB) hawkishness mount.

On the other hand, any disappointment could weigh heavily on the single currency as inflationary pressure across the union struggles to show meaningful signs of improvement.

Unless markets see reason to bet on the ECB beginning to tighten monetary policy sooner rather than later the GBP/EUR exchange rate could find some room for gains.

Hannah Wilson

Contact Hannah Wilson