Pound Sterling to Euro (GBP/EUR) Exchange Rate Knocked Off 21-Month Best as German Inflation Strengthens

Rising German Inflation Shores up Euro (EUR) Exchange Rates

UPDATE: The mood towards the Euro (EUR) improved further this afternoon as February’s German consumer price index data bettered forecasts.

As the headline inflation rate picked up to 1.6% this gave the single currency a boost against its rivals, even though this is unlikely to be enough to encourage the European Central Bank (ECB) to return to a monetary tightening bias.

Even so, this stronger showing left the Pound Sterling to Euro (GBP/EUR) exchange rate on a downtrend as market optimism over Brexit faded.

Improved UK Consumer Confidence Fails to Prevent Pound Sterling Euro (GBP/EUR) Exchange Rate Softening

A surprise improvement in the GfK consumer confidence index was not enough to keep the Pound Sterling to Euro (GBP/EUR) exchange rate on its bullish run today.

Although the index picked up from -14 to -13 in February this negative reading still reflects a general sense of worry among consumers, something which could continue to drag on growth in the months ahead.

As the initial market relief over the lower odds of a no-deal Brexit faded this left Pound Sterling (GBP) lacking in support, with a sense of uncertainty still clouding the political outlook.

While the risk of the UK leaving the EU without a deal has diminished it remains to be seen whether MPs will support Theresa May’s proposed deal or opt to extend negotiations, leaving GBP exchange rates vulnerable to further volatility.

Euro (EUR) Exchange Rates Strengthen Ahead of German Inflation Data

Anticipation ahead of this afternoon’s German consumer price index data offered a boost to the Euro (EUR), meanwhile.

Investors anticipate a modest acceleration in inflationary pressure on the year, with the headline consumer price index forecast to pick up from 1.4% to 1.5% in February.

After starting the year with a disappointing slowdown in inflation any improvement in the German CPI could help EUR exchange rates to return to a stronger footing once again.

Although the inflation rate looks set to continue trending below the European Central Bank’s (ECB) 2% target the single currency could still benefit from signs that price pressures within the German economy are not fading further.

Further Euro (EUR) Gains Forecast on Stronger Eurozone Inflation

Tomorrow’s Eurozone consumer price index data could give EUR exchange rates additional support, provided that inflation accelerates on the year.

Confirmation that prices picked back up in February would leave the GBP/EUR exchange rate on a weaker footing, even though the odds of an ECB interest rate hike remain limited.

While ECB policymakers are unlikely to vote in favour of an interest rate hike in the near future a stronger inflation reading would give the central bank less cause for dovishness.

If the odds of the ECB returning to a monetary loosening bias diminish this could see the Euro trend sharply higher against its rivals ahead of the weekend.

Slowing UK Manufacturing Sector to Add to Pound Sterling (GBP) Bearishness

The mood towards the Pound could sour further on Friday if February’s UK manufacturing PMI eases as forecast.

Further signs of a slowdown within the UK manufacturing sector could exacerbate market worries over the outlook of the wider economy, leaving GBP exchange rates under pressure.

Even if the PMI remains comfortably above the neutral baseline of 50, staying out of contraction territory, this may not be enough to support the Pound.

As long as the first quarter UK gross domestic product looks on track to see a further loss of momentum the upside potential of the GBP/EUR exchange rate is likely to prove limited.

Louisa Heath

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