Pound Sterling to Euro (GBP/EUR) Exchange Rate Stumbles on Italian Budget Progress

Potential End to Italian Budget Spat Boosts Euro (EUR) Exchange Rates

UPDATE: Reports of fresh progress towards a resolution of the Italian budget conflict offered the Euro (EUR) a boost this afternoon.

With the Italian government adopting a more flexible position in order to comply with EU budget rules markets are hopeful that the issue could soon be resolved for good.

Even so, the threat of a fresh bout of tension remains as the European Commission looks set to assess the impact of new budgetary deviations in France, limiting the negative impact on the Pound Sterling to Euro (GBP/EUR) exchange rate.

Although Theresa May named the date for the delayed vote on the proposed Withdrawal Agreement this failed to shore up Pound Sterling (GBP).

As the vote is now set to take place in mid-January a sense of uncertainty looks set to hang over the outlook of GBP exchange rates for some time to come.

Surprise Revision to Eurozone Inflation Supports Pound Sterling Euro (GBP/EUR) Exchange Rate

An unexpected downward revision to November’s finalised Eurozone consumer price index increased the pressure on the Euro (EUR) this morning.

As the headline inflation rate was revised down to 1.9%, below the European Central Bank’s (ECB) 2% target, this left EUR exchange rates on a softer footing.

With inflationary pressure looking unlikely to pick up again in the near future this added to the case for the ECB to leave interest rates on hold for longer, to the detriment of the single currency.

Investors were also discouraged to find that the Eurozone trade surplus had narrowed further than forecast in October, highlighting the continued weakness of the economic outlook.

With the Eurozone economy looking set to come under further pressure in the months ahead, even in the face of easing US-China trade tensions, the appeal of the Euro naturally diminished.

UK House Price Contraction Weighs on Pound Sterling (GBP) Exchange Rates

The Pound Sterling to Euro (GBP/EUR) exchange rate failed to find any particular traction, however, as December’s Rightmove house price index proved uninspiring.

Prices continued to contract in December, falling a further -1.5% on the month as the UK housing market showed fresh signs of slowing.

This limited the appeal of Pound Sterling (GBP) in the face of persistent market anxiety over Brexit.

With Theresa May’s Brexit deal still looking set for a significant defeat when it comes before a parliamentary vote a sense of uncertainty continues to dominate the domestic outlook.

As the ultimate outcome of the Brexit process remains to be seen the upside potential of GBP exchange rates remains muted.

GBP/EUR Exchange Rate Vulnerable Ahead of UK Inflation and BoE Announcement

Further volatility looks likely for the GBP/EUR exchange rate over the course of the week thanks to the release of the latest UK inflation data and the Bank of England’s (BoE) December policy meeting.

If the headline consumer price index eases this would give BoE policymakers greater incentive to leave interest rates on hold for the foreseeable future.

While a lower inflation rate eases pressure on wages investors are unlikely to greet any decline, leaving the Pound vulnerable to another round of selling.

The tone of policymakers at Thursday’s BoE policy announcement could also weigh heavily on GBP exchange rates if it leans towards a sense of greater caution going forward.

Unless the BoE indicates a readiness to raise interest rates again in the near future the mood towards the Pound is unlikely to improve materially.

Weaker German Business Confidence to Add to EUR Exchange Rate Bearishness

Support for the Euro may prove limited in the near future unless December’s German IFO business sentiment surveys prove positive.

Any fresh decline in business confidence, however, would leave EUR exchange rates exposed to additional downside pressure.

As long as the outlook of the Eurozone’s powerhouse economy continues to diminish the single currency is unlikely to return to a bullish trend.

Political developments may also weigh on EUR exchange rates in the days ahead as pressure on French President Emmanuel Macron continues to mount.

Hannah Wilson

Contact Hannah Wilson