Pound to Euro (GBP/EUR) Exchange Rate Forecast to Rally as Eurozone Growth Slows

Lowered BoE Growth Forecasts Weigh Heavily on Pound Euro (GBP/EUR) Exchange Rate

After the Bank of England (BoE) opted to leave interest rates on hold once again the Pound to Euro (GBP/EUR) exchange rate has come under renewed pressure.

Even though the decision to leave monetary policy unchanged was largely anticipated this still weighed heavily on demand for the Pound (GBP).

Markets were also discouraged as the quarterly Inflation Report revealed downward revisions to the BoE’s growth forecasts, with the economy expected to expand just 1.4% in 2018 as opposed to the 1.8% forecast in February.

All in all, this undermined confidence in the outlook of the UK economy, with investors still debating the odds of the central bank raising interest rates again before the end of the year.

This prompted GBP exchange rates to slump sharply on Thursday, especially as the latest industrial production and construction output figures disappointed.

GBP/EUR Exchange Rate Shrugs Off Prospect of Populist Italian Government

Reports that the populist Five Star Movement and the far-right League have forged an alliance to take power in Italy failed to boost the Pound to Euro (GBP/EUR) exchange rate.

While this would see Italy in the hands of two Eurosceptic parties the news failed to impact market sentiment, with the Euro (EUR) showing a fairly limited reaction.

Investors were quick to shrug off the prospect of a fresh political conflict within the Eurozone, in part thanks to doubts that the marked differences between the two parties will make the alliance short-lived.

However, EUR exchange rates may struggle to remain on a stronger footing if Italy’s new government looks set to butt heads with the EU.

GBP/EUR Exchange Rate Vulnerable to Weaker UK Wage Growth

The Pound to Euro (GBP/EUR) exchange rate could see fresh losses on Tuesday with the release of the latest raft of UK labour market data.

Particular focus will fall on the average weekly earnings figures, given the BoE’s previous concerns on the subject of domestic wage growth.

Any uptick in wages should offer GBP exchange rates a fresh rallying point, even though the odds of an imminent BoE interest rate hike are unlikely to significantly improve on the back of the data.

On the other hand, if growth in earnings slowed in the three months to March the appeal of the Pound is likely to diminish further.

Unless investors see cause for confidence in the domestic outlook GBP exchange rates look set to remain biased to the downside, particularly in the absence of any greater clarity over Brexit.

Weaker Eurozone GDP Forecast to Boost Pound Euro (GBP/EUR) Exchange Rate

Further volatility is forecast for the Pound to Euro (GBP/EUR) exchange rate on the back of the first quarter German and Eurozone gross domestic product reports.

With growth across the currency union thought to have slowed in the first three months of the year forecasts point towards weaker showings across the board.

While the Eurozone is still expected to post solid growth of 2.5% on the year, signs of weakness within the underlying picture are likely to discourage investors from favouring the Euro.

As the European Central Bank (ECB) does not appear to be in any hurry to return to a monetary tightening bias the upside potential of EUR exchange rates is naturally muted.

Any increase in jitters over the political situation in Italy could also help to boost the Pound to Euro (GBP/EUR) exchange rate.

Hannah Wilson

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