Pound to Euro Exchange Rate Forecast to Rally on Softening Eurozone Economic Growth

Update: Pound to Euro (GBP/EUR) Exchange Rate Bearish After European Commission Growth Forecasts

The European Commission’s latest growth forecasts did not offer the Pound to Euro (GBP/EUR) exchange rate any particular support on Thursday afternoon.

As the updated forecasts point towards the UK continuing to trail its European neighbours with annual growth of just 1.5% in 2018 the mood towards the Pound (GBP) remained generally bearish.

With the US Dollar (USD) still out of favour with investors this offered additional support to Euro (EUR) exchange rates, meanwhile.

Pound Euro (GBP/EUR) Exchange Rate Downside Limited by Surprise Eurozone Inflation Dip

As the Eurozone consumer price index fell short of forecast in April this offered some support to the Pound to Euro (GBP/EUR) exchange rate, eroding confidence in the currency union’s inflationary outlook.

Investors were surprised to find that inflationary pressure had eased from 1.3% to 1.2% on the year, falling further behind the European Central Bank’s (ECB) 2% target.

This raises the risk of the ECB leaving its quantitative easing programme in place for longer, with monetary policy looking set to remain on hold for some months to come.

Naturally, demand for the Euro (EUR) declined in the wake of the data, with markets bracing for a longer period of ECB dovishness.

However, the downside potential of EUR exchange rates was still limited on Thursday thanks to the less hawkish nature of the latest Federal Reserve policy meeting.

Weaker-Than-Forecast UK Services PMI Keeps GBP/EUR Exchange Rate Under Pressure

The Pound to Euro (GBP/EUR) exchange rate came under renewed pressure, however, on the back of a disappointing UK services PMI.

While the index strengthened from 51.7 to 52.8 in April this was not enough to boost Pound (GBP) exchange rates, with investors having anticipated a stronger uptick on the month.

Even though the service sector showed some expansion concerns remain over the outlook of the UK economy, which appears to have started the second quarter on a sluggish footing.

As the odds of an imminent Bank of England (BoE) interest rate hike have almost completely faded this has left the Pound on a generally weaker footing.

With economic growth looking set to lose further momentum over the coming months the strength of GBP exchange rates is likely to remain limited.

Underwhelming Eurozone PMIs Could Boost GBP/EUR Exchange Rate

Friday’s raft of Eurozone services PMIs could put further pressure on the Pound to Euro (GBP/EUR) exchange rate if the figures add to evidence that the currency union is losing momentum.

The finalised figures are forecast to confirm a modest easing in growth across the Eurozone, giving investors fresh incentive to sell out of the Euro.

After the weakening of the first quarter Eurozone gross domestic product confidence in the outlook of the domestic economy has naturally softened.

Unless markets see signs of resilience in the services and composite PMIs this could leave EUR exchange rates on a weaker footing ahead of the weekend.

Even if the PMIs surprise to the upside, though, this is unlikely to be enough to encourage any particular shift in the ECB’s policy outlook.

Pound Euro (GBP/EUR) Exchange Rate Volatility Forecast on Local Election Results

Uncertainty surrounding Brexit could keep the Pound to Euro (GBP/EUR) exchange rate biased to the downside for some time to come.

With Theresa May’s cabinet still split on the subject of the UK’s future connection to the customs union investors continue to lack any particular clarity over the likely outcome of the Brexit process.

The results of the latest UK local elections may provoke additional volatility for GBP exchange rates, with the votes having the potential to deliver a blow to the position of the Conservative government.

If the elections are seen to lend support to Theresa May’s government, however, this could offer the Pound to Euro (GBP/EUR) exchange rate a fresh boost.

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