Update: Italian Uncertainty Forecast to Bolster Pound Sterling Euro (GBP/EUR) Exchange Rate
Fears over the prospect of a fresh Eurozone crisis have continued to buoy the Pound Sterling to Euro (GBP/EUR) exchange rate this afternoon.
There is particular concern that a fresh round of elections could simply deepen the crisis gripping Italy, with the populist parties likely to benefit from this turmoil.
Confidence in the Euro (EUR) looks set to remain muted over the coming days unless there are signs that the political situation is easing in either Italy or Spain. A Spanish political crisis also seems likely after a high-profile corruption case engulfed the government.
Pound Sterling Euro (GBP/EUR) Exchange Rate Benefits From Italian Political Crisis
Political worries helped to shore up the Pound Sterling to Euro (GBP/EUR) exchange rate as the threat of fresh elections hangs over both Italy and Spain.
Italian President Sergio Mattarella’s decision to veto the finance minister proposed by the coalition of the Five Star Movement and the League has plunged the country into a fresh state of uncertainty.
As Mattarella opted to appoint former International Monetary Fund (IMF) official Carlo Cottarelli as interim Prime Minister, this has paved the way for another election later in the year.
Rather than calming markets this left the Euro (EUR) on a weaker footing, casting fresh doubt over Italy’s ongoing membership of the Eurozone.
With Spanish Prime Minister Mariano Rajoy also in danger thanks to the threat of a no confidence vote following a corruption scandal, investors saw little reason for confidence in the Eurozone, to the detriment of EUR exchange rates.
Weaker UK Growth Limits GBP/EUR Exchange Rate Upside
As the updated first quarter UK gross domestic product data confirmed the economy had slowed sharply at the start of the 2018, this has weighed heavily on the Pound Sterling to Euro (GBP/EUR) exchange rate.
The figures have further undermined the case for the Bank of England (BoE) to raise interest rates in the coming months, with weak quarterly growth of just 0.1% denting confidence in the domestic outlook.
With the odds of a 2018 BoE interest rate hike diminishing Pound Sterling (GBP) exchange rates came under renewed pressure, particularly in the wake of weaker inflation data.
Lingering uncertainties over Brexit have given GBP/EUR traders further cause for caution, with UK and EU officials still looking at odds on the subjects of the Irish border and the status of the City of London
Rising Eurozone Inflation Forecast to Dent GBP/EUR Exchange Rate
Further pain could be in store for the Pound Sterling to Euro (GBP/EUR) exchange rate this week on the back of May’s German and Eurozone consumer price index data.
Investors are hoping to see signs that inflationary pressure across the currency union picked back up in May, something which could boost EUR exchange rates.
If Eurozone inflation accelerates from 1.2% to 1.6% on the year this could encourage European Central Bank (ECB) policymakers to take a more hawkish outlook in the months ahead.
Even though inflation is still trailing the ECB’s 2% target any solid improvement is likely to give the Euro a rallying point in the short term.
Any signs of weakness, however, may help the GBP/EUR exchange rate to extend its recent gains further.
Pound Sterling Euro (GBP/EUR) Exchange Rate Vulnerable to Higher UK Consumer Debt
With UK data releases a little thinner on the ground this week the Pound Sterling to Euro (GBP/EUR) exchange rate may struggle to gain any particular traction.
However, Thursday’s UK net consumer credit figure could weigh heavily on demand for Pound Sterling if debt shows a significant increase on the month.
Forecasts point towards an uptick from £0.3 billion to £1.4 billion in consumer credit, which could give BoE policymakers some cause for concern.
Even with wages outpacing inflation once again there are worries over the resilience of domestic households, especially if Brexit-based uncertainty continues to hang over the economic outlook.
A stronger showing from Friday’s UK manufacturing PMI may shore up the Pound Sterling to Euro (GBP/EUR) exchange rate, though.