Surprise Eurozone Inflation Downgrade Unable to Keep Pound Euro Exchange Rate at Fortnightly High

Pound Sterling Euro (GBP/EUR) Exchange Rate Fails to Capitalise on Eurozone Inflation Downgrade

A surprise downward revision to July’s Eurozone consumer price index was not enough to keep the Pound Sterling to Euro (GBP/EUR) exchange rate from losing ground at the start of the week.

As the headline inflation rate was lowered from 1.1% to 1.0% this increased the likelihood of the European Central Bank (ECB) delivering its anticipated bout of monetary loosening in September.

This weaker showing failed to dent the Euro (EUR), however, thanks to an accompanying improvement in the underlying core inflation measure.

Frederik Ducrozet of Pictet Asset Management noted this unexpected improvement, tweeting:

Pound Falters on Latest Signs of UK Housing Market Decline

As August’s Rightmove house price index saw a sharp -1% contraction on the month worries over the outlook of the UK economy remain, meanwhile.

With the domestic housing market continuing to show signs of weakness, reflecting a decline in household confidence, Pound Sterling (GBP) faltered.

Anxiety over Brexit also put a dampener on GBP exchange rates today, as markets continue to weigh up the odds of the UK crashing out of the EU without a deal.

The prospect of a potential general election still limited the appeal of the Pound, with the likelihood of further political turmoil and uncertainty giving investors little cause for confidence.

Negative Industrial Trends Index Set to Drag on Pound Sterling

The GBP/EUR exchange rate could extend its latest downtrend further on Tuesday with the release of August’s CBI industrial trends index.

While forecasts point towards the index picking up, reversing some of the previous month’s decline to -34, the figure is expected to remain within negative territory.

As long as the outlook for the industrial sector looks set to continue dragging on economic growth the mood of the Pound is likely to sour.

Although the service sector accounts for a far larger proportion of the UK gross domestic product any fresh signs of weakness here could weigh heavily on GBP exchange rates.

With Brexit-based uncertainty unlikely to ease in the near future the risk of a third quarter economic contraction persists.

Underwhelming Eurozone PMIs Forecast to Limit GBP/EUR Exchange Rate Downside

Thursday’s raft of Eurozone manufacturing and services PMIs may dent the appeal of the Euro, however.

Evidence that growth across the currency union weakened further in August would raise the risk of an underwhelming third quarter gross domestic product reading.

If the Eurozone appears at risk of losing further momentum in the third quarter this could drive EUR exchange rates sharply lower across the board.

Unless the manufacturing and service sectors can demonstrate a greater level of resilience the single currency looks set to fall further out of favour with investors.

Even so, once markets price in the heightened odds of a significant round of ECB monetary loosening the downside potential of the Euro could diminish.

Louisa Heath

Contact Louisa Heath