Update: Pound Euro (GBP/EUR) Exchange Rate Fails to Benefit From Lower-Than-Forecast Government Borrowing
Although UK public sector net borrowing saw a smaller uptick than forecast in April this failed to offer the Pound to Euro (GBP/EUR) exchange rate any particular encouragement.
As new government debt still rose 6.23 billion on the month this did little to improve the appeal of the Pound (GBP) on Tuesday, especially as the latest CBI industrial trends data proved disappointing.
With signs pointing towards continued weakness within the UK economy the GBP/EUR exchange rate remained under pressure on Tuesday afternoon.
Underwhelming Eurozone Inflation Supports Pound Euro (GBP/EUR) Exchange Rate
Confirmation that the Eurozone consumer price index had weakened from 1.3% to 1.2% in April shored up the Pound to Euro (GBP/EUR) exchange rate last week.
As inflation faltered on the year this encouraged bets that the European Central Bank (ECB) would continue to leave monetary policy on hold for the foreseeable future.
This left the Euro (EUR) on a weaker footing, especially as German inflation data also fell short of forecasts.
With inflationary pressure struggling to build, the chances of the ECB returning to a more hawkish stance appear rather muted.
Although Friday’s German producer price index data proved a little more positive in nature this was not enough to encourage any particular boost for the Euro.
BoE Comments Provoke GBP/EUR Exchange Rate Volatility
Comments from Bank of England (BoE) policymaker Gertjan Vlieghe prompted the Pound to Euro (GBP/EUR) exchange rate to surge sharply higher on Tuesday morning.
As Vlieghe expressed a more upbeat outlook on interest rates, seeing the possibility of rates rising six times over the next three years, this encouraged investors to pile into the Pound (GBP).
However, this bullishness ultimately proved short-lived thanks to commentary from other members of the BoE’s Monetary Policy Committee.
Governor Mark Carney reiterated what he thought the negative impact that the Brexit vote has had on the UK economy – which is now 1% smaller than it was forecast to be two years ago – and the financial health of domestic households.
With the majority of BoE policymakers looking set to maintain a relatively cautious outlook on monetary policy in the months ahead GBP exchange rates have returned to a softer footing.
Stronger Eurozone Economy Could Weigh on Pound Euro (GBP/EUR) Exchange Rate
May’s raft of Eurozone manufacturing and services PMIs may offer support to the Pound to Euro (GBP/EUR) exchange rate if domestic growth shows fresh signs of slowing.
Evidence that the Eurozone economy is continuing to lose momentum into the second quarter would weigh heavily on demand for the Euro.
Even if the PMIs remain firmly within expansion territory any signs of weakening are likely to be seized upon by investors.
Business and consumer confidence surveys may shore up EUR exchange rates, however, if sentiment within the currency union shows signs of improvement.
GBP/EUR Exchange Rate to be Driven by UK Inflation Data
The Pound to Euro (GBP/EUR) exchange rate could find a fresh rallying point on the back of April’s UK consumer price index data.
Any uptick in inflationary pressure could send GBP exchange rates pushing higher across the board, even if the headline CPI holds steady at 2.5% on the year.
Signs that inflation is still building within the UK economy would give investors reason to bet on the prospect of the BoE raising interest rates again sooner rather than later.
On the other hand, weakening price pressures could encourage the BoE to leave monetary policy on hold for longer as the need for higher interest rates eases.
Focus will also fall on further commentary from BoE Governor Mark Carney, which could weigh heavily on the Pound to Euro (GBP/EUR) exchange rate.