Pound Euro (GBP/EUR) Exchange Rate Falls Back as UK Braces for Higher Inflation

Rising UK Inflation Expectations Arrest Pound Sterling (GBP) Gains

As UK consumer inflation expectations hit a near six-year high in August the Pound Sterling to Euro (GBP/EUR) exchange rate failed to hold onto its positive footing.

With the public now expecting to see inflation hit 3.3% in the year ahead the mood towards Pound Sterling (GBP) naturally soured.

This could put greater pressure on the Bank of England (BoE) as it struggles to balance rising inflationary pressure with signs of a growing economic slowdown.

Although Labour confirmed that it will not vote in favour of a general election on Monday, delivering a fresh blow to Boris Johnson’s plans, this was not enough to give GBP exchange rates a fresh boost.

EUR Exchange Rates Stumble as German Production Shrinks

Fresh signs of weakness from the German economy weighed on the Euro (EUR), meanwhile, as July’s industrial production figures fell short of forecast.

As industrial output continued to contract on both the month and the year confidence in the outlook of the Eurozone’s powerhouse economy diminished further.

Coupled with yesterday’s weak factory orders data this disappointing showing fuelled speculation that Germany could enter a technical recession in the third quarter.

Remarking on the data, Carsten Brzeski, chief economist at ING, noted:

‘On the year, industrial production was down by 4.2%. Industrial production would have to increase by a total of more than 2.5% in the coming two months just to return to the level of the second quarter. Not impossible but currently very unlikely. Even activity in the construction sector seems to be stuttering these days, increasing by a meagre 0.3% MoM.’

Weakening German Trade Forecast to Add to Euro (EUR) Decline

German trade data could put additional pressure on EUR exchange rates on Monday, with forecasts pointing towards a fresh slowdown.

Any further narrowing of the trade surplus may encourage investors to continue selling out of the Euro, given the German economy’s reliance on trade.

If export volumes show another month of contraction this could offer the GBP/EUR exchange rate a solid rallying point.

Although recent signs of progress towards fresh US-China trade talks have eased anxiety over the global trade outlook the potential for another bout of deterioration remains.

With the German industrial sector already in a prolonged state of decline evidence of a further slowdown in international demand could weigh heavily on the Euro.

Political Drama Set to Fuel Further GBP/EUR Exchange Rate Moves

A fresh week of parliamentary drama looks set to fuel continued volatility for the GBP/EUR exchange rate, however.

While the risk of an imminent snap general election has eased significantly the Pound remains vulnerable to the current atmosphere of political uncertainty.

Even if MPs push ahead with legislation intended to avert a no-deal Brexit there is still the potential for further disruption thanks to the beleaguered prime minister.

The approaching Brexit deadline is also likely to put some pressure on GBP exchange rates unless there are signs of a potential extension being agreed.

If the EU fails to grant a fresh extension to the deadline the risk of greater economic disruption remains.

Louisa Heath

Contact Louisa Heath