Currencies Bulletin: Pound Euro (GBP/EUR) Exchange Rate Slides as UK Inflation Eases to 21-Month Low

GBP/EUR – Pound Softens as UK Inflation Slows to 21-Month Low

November’s UK consumer price index data left the Pound on a weaker footing this morning as the headline inflation rate eased to a 21-month low of 2.3%.

Although this decline was in line with forecasts GBP exchange rates still moved lower in the wake of the data, even as wage growth looks set to accelerate further before the end of the year.

With inflation moving back towards the Bank of England’s (BoE) 2% target rate the case for further monetary tightening continues to diminish.

Further weakness is likely for the Pound on the back of Thursday’s BoE policy announcement, with the minutes looking set to reflect a more cautious policy outlook.

As long as the BoE appears on course to leave interest rates on hold for longer the GBP/EUR exchange rate is likely to remain biased to the downside.

GBP/USD – Worries over Prospect of No-Deal Brexit Dent Pound

As the government stepped up its preparations for a potential no-deal Brexit confidence in the outlook of the UK economy continued to sour.

This limited the appeal of the Pound, with Theresa May’s unpopular Brexit deal not set to come before MPs until mid-January.

With uncertainty set to persist for the foreseeable future GBP exchange rates struggled to find any particular traction.

Friday’s UK public sector net borrowing figure and finalised third quarter growth data may put further pressure on the Pound.

Rising government debt and fresh evidence of softening domestic growth would give investors fresh incentive to sell out of the Pound, leaving GBP exchange rates to extend their recent downtrend.

USD/GBP – US Dollar Softens Amid Federal Reserve Policy Speculation

As the Trump administration levelled fresh criticism at the Federal Reserve over its intention to raise interest rates the mood towards the US Dollar soured.

Markets now see less chance of the Fed pursuing an aggressive pace of monetary tightening over the coming year, lowering the odds of policymakers raising interest rates more than twice in 2019.

This limited the strength of USD exchange rates even in the face of wider market risk aversion and a solid rebound in the US construction sector in November.

If the Fed delivers a dovish interest rate hike at its December policy meeting this could see the US Dollar shedding further ground overnight.

On the other hand, if policymakers fail to alter the dot plot projecting the course of monetary policy in 2019 USD exchange rates may find a fresh boost.

EUR/USD – Surprise Eurozone Inflation Revision Weighs on Euro

A surprise downward revision to November’s finalised Eurozone consumer price index left the Euro on the back foot this week.

With year-on-year inflation falling below the European Central Bank’s (ECB) 2% target, easing from 2.2% to 1.9%, this increased the odds of the central bank leaving policy on hold for some time to come.

December’s German IFO business sentiment survey also put the single currency under pressure as sentiment continued to decline.

Another weak reading from the latest German GfK consumer confidence index could see EUR exchange rates slip lower on Friday.

Unless investors see signs of greater resilience within the Eurozone economy demand for the Euro is likely to ease further.

Hannah Wilson

Contact Hannah Wilson