Pound to Euro Forecast: Could UK and Eurozone Inflation Boost GBP/EUR Exchange Rate Gains?

Central Bank Speculation Keeps Pound to Euro Exchange Rate Advancing This Week

In the light of solid Bank of England (BoE) interest rate hike bets and a dovish meeting minutes report from the European Central Bank (ECB), the Pound to Euro (GBP/EUR) exchange rate has seen major gains this week.

This would be the second week of strong gains for GBP/EUR. The pair opened the week at the interbank level of 1.14 and has since climbed above the key level of 1.15.

On Friday, GBP/EUR trended near its best levels since May 2017.

Market expectations that the Bank of England (BoE) will hike UK interest rates in May, as well as a relatively dovish meeting minutes report from the European Central Bank (ECB) has kept the pair appealing.

The Bank of England (BoE) has shown no signs that it is taking a more cautious tone, despite underwhelming UK ecostats. This has kept markets confident that the bank will hike rates in May and the Pound (GBP) has benefitted.

Euro (EUR) Exchange Rates Down as European Central Bank (ECB) Takes Dovish Tone

Thursday saw the publication of the European Central Bank’s (ECB) latest meeting minutes report, which dampened down some of the recent positive sentiment investors have had towards the Euro.

Speculation that the bank was increasingly discussing issues such as the path of Eurozone interest rates and even speculation that it could hike its deposit rate before interest rates rise were doused by the report, and the Euro (EUR) weakened.

The bank highlighted concerns with the strength of the Euro itself, as well as the possibility of a trade war which could engulf the Eurozone.

According to the ECB minutes:

‘It was remarked that the recent movements in the euro exchange rate seemed to relate more to the relative monetary policy shocks, including communication, and less to improvements in the macroeconomic outlook,

This suggested that the exchange rate appreciation could be expected to have a more negative impact on inflation.’

The bank remained concerned that various issues could continue to keep Eurozone inflation from strengthening.

As a result, market hawkishness regarding the ECB outlook waned slightly and the Euro was sold.

Pound (GBP) Exchange Rates Push to New Highs despite Mixed UK Data

Despite most of this week’s UK datasets falling short of expectations, the Pound was able to sustain notable gains against the Euro as investors remained confident that the Bank of England (BoE) would hike UK interest rates in May.

Wednesday’s UK manufacturing and industrial production results disappointed in every print, and NIESR’s Q1 UK growth estimate came in at just 0.2%.

Still, despite the weaker UK ecostats the Bank of England (BoE) has yet to show any signs of dovish shifts on monetary policy.

Bank officials have taken hawkish stances over the past month, making markets more confident it is signalling that it is preparing to hike UK interest rates in May.

Pound to Euro (GBP/EUR) Forecast: Key Inflation Reports in Focus

Next week’s economic calendar will be busier and this could mean another week of big movement for the Pound to Euro (GBP/EUR) exchange rate if any of the data surprises investors.

Key UK data will be published throughout the week, giving Pound investors plenty to react to.

Britain’s February jobs market results will be published on Tuesday, followed by March Consumer Price Index (CPI) results on Wednesday and March retail sales on Thursday.

The week’s most influential UK stats will be UK wage growth and inflation. If wage growth and inflation are strong or stronger than expected, the Pound could see further gains as Bank of England (BoE) rate hike bets would firm.

On the other hand, weak wage data or inflation may prompt the BoE to take a more dovish shift which would certainly weaken the Pound.

Multiple key Eurozone stats will be published too. April confidence survey data from ZEW will be published on Tuesday, followed by the Eurozone’s final March inflation results on Wednesday.

If the Eurozone inflation data beats expectations, GBP/EUR may fall from its recent highs.

Josh Ferry Woodard

After leaving university in 2011 Josh briefly worked as a currency analyst in the South West of Cornwall. Josh continued monitoring the currency markets and publishing exchange rate analysis after moving to London in 2012, with a particular focus on the impact of economic and political stimuli on forex. Josh was a regular contributor to The Telegraph’s weekly currency feature for several years.

Contact Josh Ferry Woodard