Three-Year Low in UK Inflation Adds to Pound Sterling Euro (GBP/EUR) Exchange Rate Softness
As the headline UK consumer price index held steady at a three-year low of 1.5% in November the Pound Sterling to Euro (GBP/EUR) exchange rate completely reversed its post-election gains.
Investors took no encouragement from the persistently lacklustre inflation data, with price pressures still falling far short of the Bank of England’s (BoE) 2% target.
With wage growth also showing signs of slowing in the fourth quarter markets see an increasing risk of the BoE opting to cut interest rates again in 2020.
Coupled with lingering anxiety over the prospect of a potential cliff-edge Brexit at the end of 2020 this left Pound Sterling (GBP) with little in the way of support.
Euro Struggles to Capitalise on Strengthening German Business Optimism
While December’s German IFO business sentiment survey showed increased signs of optimism this failed to give the Euro (EUR) any significant boost, meanwhile.
Even though the business climate index crept up from 95.1 to 96.5 in the final month of the year investors remain wary of the potential for a fourth quarter slowdown in the Eurozone’s powerhouse economy.
The mood towards the single currency also took a blow from the latest Eurozone construction output data, which failed to bounce back as far as forecast on the year.
With the currency union still showing signs of weakness EUR exchange rates struggled to find any particular traction today.
GBP/EUR Exchange Rate Vulnerable to Signs of BoE Dovishness
Further weakness may be in store for the GBP/EUR exchange rate tomorrow once the BoE announces its final interest rate decision of 2019.
Although no change in monetary policy looks likely at this stage investors are keen to gauge the current outlook of policymakers and the odds of interest rates seeing a cut next year.
After the underwhelming November inflation data the risk of a rate cut appears heightened, creating the potential for additional selling pressure if the Monetary Policy Committee (MPC) leans more towards dovishness.
On the other hand, if the central bank signals a willingness to leave interest rates on hold for longer this could offer the Pound a temporary rallying point.
Improved German Consumer Confidence Forecast to Boost Euro Demand
Worries over the outlook of the German economy could ease ahead of the weekend, meanwhile, if the German GfK consumer confidence index picks up on the month.
Evidence of improved domestic confidence may encourage hopes that the economy has started to recover some of its lost momentum, further diminishing the risk of a technical recession.
As long as signs point towards a greater level of German resilience the appeal of the Euro looks set to improve, particularly if global trade tensions show fresh signs of easing.
However, if the latest commentary from European Central Bank (ECB) policymakers shows evidence of dovishness this could help the GBP/EUR exchange rate to recover some ground in the near term.