GBP/EUR Exchange Rate Rangebound as UK Inflation Falls Below Forecasts
The Pound to Euro (GBP/EUR) exchange rate held steady today, with the pairing currently trading around €1.105.
Today saw the release of November’s UK Consumer Price Index, which fell below forecasts from 0.7% to 0.3%.
However, inflation could edge up in 2021 on should the UK leave the EU without a deal.
Ruth Gregory, an analyst at Capital Economics, explains:
‘The sharp fall in inflation from 0.7% in October to 0.3% in November and in the core rate from 1.5% to 1.1% came as a bit of a surprise. Some of these moves were driven by temporary factors so we still expect inflation to rise temporarily back towards the 2% target next year.
‘Beyond that, though, the slack in the economy should keep underlying price pressures subdued and allow inflation to drop back to 1.5% in 2022. That is unless a no deal Brexit pushes it up to a peak of 3-4%.’
Brexit developments have taken a positive turn, however, with the European Commission’s (EC) President, Ursula von der Leyen, saying that a ‘path to agreement’ between the UK and EU now exists.
As a result, GBP investors have become more optimistic that the UK could leave with the EU with a trade deal on January 1st.
Euro (EUR) Steady as Eurozone Economy Shows Signs of Stabilising
The Euro (EUR) struggled to make any gains against the Pound today following the release of the flash Eurozone’s PMI Composite date for December.
With the figure remaining in contraction territory at 49.8, EUR investors are becoming increasingly concerned about the Eurozone’s economy going into 2021.
Chris Williamson, the Chief Business Economist at IHS, commented:
‘The data hint at the economy close to stabilising after having plunged back into a severe decline in November amid renewed COVID19 lockdown measures. The fourth quarter downturn consequently looks far less steep than the hit from the pandemic seen earlier in the year, though the picture is very mixed by sector.’
However, with Germany due to re-enter lockdown in January, Eurozone markets are remaining cautious.
Phil Smith, the associate director at IHS Markit, was more hopeful. German manufacturers, he said, are feeling more ‘positive about the outlook for 2021, amid the imminent rollout of COVID vaccines’.
GBP/EUR Forecast: Could a Dovish Bank of England Drag Down Sterling Tomorrow?
Pound (GBP) traders will be awaiting tomorrow’s Bank of England (BoE) interest rate decision. The rate is expected to remain at 0.1%.
Any dovish commentary about the state of the British economy would be GBP-negative.
Brexit will remain in focus. Any further indications of concessions between the UK and the EU towards a post-Brexit trade deal boosting Sterling.
Euro (EUR) investors will be awaiting tomorrow’s release of the Eurozone’s Consumer Price Index for November.
If this shows a significant downturn in the bloc’s economy, then we could see the single currency suffer.