Pound Sterling to Euro (GBP/EUR) Exchange Rate Rises After Surprise Eurozone Inflation Drop

Hopes of Softer Brexit Boost GBP/EUR Exchange Rate

UPDATE: Demand for Pound Sterling (GBP) picked up further over the course of the afternoon as markets speculated that the UK could be on course for a softer form of Brexit.

While the parliamentary deadlock showed no real signs of breaking investors were nevertheless encouraged to bet on hopes that the UK could remain in a customs union with the EU.

The mood towards the Euro (EUR) continued to deteriorate, meanwhile, keeping the GBP/EUR exchange rate on a solid uptrend.

Weaker Eurozone Inflation Encourages Pound Sterling Euro (GBP/EUR) Exchange Rate Gains

A surprise easing in March’s Eurozone consumer price index data helped to shore up the Pound Sterling to Euro (GBP/EUR) exchange rate this morning.

Following on from Germany’s underwhelming inflation data the headline CPI dipped from 1.5% to 1.4% on the year.

As the core inflation rate also showed a decline this suggests that inflationary pressure across the currency union is failing to pick up as investors would like, increasing the likelihood of further European Central Bank (ECB) dovishness.

Coupled with the underwhelming nature of March’s finalised Eurozone manufacturing PMIs, which saw the sector fall further into a state of contraction, this left the Euro (EUR) trending lower across the board.

Increased Stockpiling Drives Surge in UK Manufacturing PMI Ahead of Brexit

Pound Sterling (GBP) also found support on the back of March’s UK manufacturing PMI, which bettered expectations to surge from 52.1 to 55.1.

However, although the sector showed solid growth on the month this was largely driven by businesses stockpiling in anticipation of further Brexit-based disruption.

With this increased level of growth unlikely to prove sustainable, as limited warehouse capacity prevents further stockpiling, confidence in the outlook of the UK economy remains muted.

As Rob Dobson, Director at IHS Markit, noted:

‘The stock-building boost introduces a major headwind for demand, output and jobs growth moving forward. Manufacturers are already reporting concerns that future trends could be constrained as inventory positions across the economy are unwound. The survey is also picking up signs that EU companies are switching away from sourcing inputs from UK firms as Brexit approaches.’

Positive UK Services PMI to Offer GBP/EUR Exchange Rate Support

The GBP/EUR exchange rate could gain further ground this week if the latest UK construction and services PMIs also exceed forecasts.

A resilient performance from the service sector could offer the Pound a particular boost, with the sector accounting for more than three quarters of the UK gross domestic product.

However, if the PMI slows from 51.3 to 51.0 as forecast this would leave GBP exchange rates exposed to fresh selling pressure on Wednesday.

Even if all of March’s PMIs print well, though, the Pound still looks set to remain under pressure as a result of Brexit-based uncertainty and political jitters.

Without signs of progress towards a positive Brexit resolution worries over the UK’s future are likely to weigh on Pound Sterling in the days ahead.

Signs of Eurozone Slowdown Forecast to Keep Euro (EUR) Under Pressure

If Eurozone data continues to disappoint over the course of the week this may keep the Euro biased towards the downside, however.

With the currency union having already shown signs of a slowdown the prospect of further weakness could see investors continue to pile out of the single currency.

The release of the ECB’s March meeting minutes could put additional pressure on EUR exchange rates, with investors expecting to see fresh signs of dovishness.

As long as the central bank looks set to maintain a cautious policy outlook this should limit the vulnerability of the GBP/EUR exchange rate in the near term.

Louisa Heath

Contact Louisa Heath