Pound Holds out against Euro despite Falling against Most Majors
UPDATE: This afternoon the Pound (GBP) was managed to hold off a slide against the Euro despite falling across the board.
This latest Pound weakness comes after faltering GBP investor sentiment following mixed GDP data and falling business investment.
It has managed this due to some serious Euro weakness caused by the Italian budget crisis, which has left a sea of red across European stock markets this afternoon and seen EUR dip against the US Dollar.
Slowing Core Inflation Reduces ECB Rate Hike Odds Causing GBP/EUR Gain
Despite European Central Bank (ECB) President Mario Draghi claiming earlier in the week that there would be a ‘vigorous pick up in underlying inflation’ figures released today would seem to suggest otherwise.
The annualised inflation rate estimate for September rose from 2% to 2.1% per cent as forecast, but the core estimate – which excludes inelastic fixed costs such as food and fuel – dropped from 1% to 0.9%.
With economists having expected the core expectations rate to have gone up to 1.1 per cent the Euro naturally came under pressure as a result.
Euro (EUR) traders considered the slowing core inflation result to mean the chances of a near-term ECB interest rate hike have now reduced, and at the time of writing GBP/EUR was up 0.2% on the day.
Controversial Italian Budget Move Continues to Rattle Euro Traders and Brings EUR/USD Down 0.4%
Italy is continuing to shake the Eurozone today as its new coalition government passes a budget that flouts the EU’s austerity rules.
Rome is now on a collision course with Brussels after it passed its latest budget, which targets a deficit of 2.4% of GDP despite the EU requiring an upper limit of 2%.
The move has caused Italian bond yields to jump and bank stocks to fall sharply, as it is feared Italy’s debt load and shaky economic situation will prove to be unsustainable.
Opponents of the Italian government in the Democratic Party have called the budget ‘irresponsible’, claiming it has led to the 0.4% decline the Euro (EUR) has suffered today against the US Dollar (USD).
In reaction to the austerity busting budget, the European Commission’s Pierre Moscovici urged restraint, saying:
‘If Italians continue to get into debt, what happens? The interest rate increases and the cost of servicing debt becomes greater.
‘Italians must not be mistaken: every euro more of debt is one euro less for the highways, for schools, for social justice.’
GBP/EUR Exchange Rate Faces Downside Pressure from Mixed GDP Data and Slipping Business Investment
Away from continental Europe, the GBP/EUR pairing has seen some support today from the release of the latest UK GDP data, which revealed a Q-on-Q rise of 0.4%.
While this was in line with expectations Pound (GBP) investors were disappointed to see the annualised rate did not live up expectations, coming in at 1.2% against forecasts of a 1.3% rise. In addition, Q1 growth was revised down to 0.1% after VAT receipts were accounted for.
In addition to this mixed picture, some rather disappointing business investment figures took any shine off the Pound this morning, with Q2 business investment reported to have fallen by 0.7% against expectations of a rise of 0.5%.
GBP/EUR Exchange rate Outlook: Could Eurozone PMIs Lead to Pound Sterling Gains?
Next week sees the release of a number of key Eurozone and UK PMIs, which will provide a snapshot of the economic situation.
Monday will see UK and Eurozone-wide manufacturing data for September, while Tuesday will see the publication of some more Eurozone inflation data, this time in the form of producer prices.
The Pound (GBP) could trade tightly against the Euro (EUR) at the start of the week, as Eurozone manufacturing output is tipped to slow alongside a dip in UK manufacturing levels.
In the more immediate future, a speech from the Bank of England’s Dave Ramsden this afternoon could give markets some insight into the bank’s reaction to today’s GDP numbers and any hints of policy outlook going forward.