Softer Spanish Inflation Offers Boost to Pound Euro Exchange Rate
A downward revision to January’s finalised Spanish inflation rate helped to limit the downside potential of the Pound to Euro (GBP/EUR) exchange rate.
As the inflation rate was revised down from an initial reading of 0.1% to 0% this gave investors fresh incentive to sell out of the Euro (EUR) ahead of the weekend.
With inflationary pressure weakening across the Eurozone, in spite of Germany’s positive figure, the risk of further European Central Bank (ECB) dovishness remains.
The lingering odds of the central bank engaging in further monetary loosening measures in the months ahead left EUR exchange rates on a generally weaker footing.
UK Gross Domestic Product Data Fails to Drag Down GBP Exchange Rates
While the latest UK gross domestic product report confirmed that the economy contracted sharply in 2020 this was not enough to drag Pound Sterling (GBP) lower, meanwhile.
Although growth slumped -6.5% on the year in December this was not quite as sharp a decline as forecasts had suggested, leaving GBP exchange rates room for gains.
Even with the economy showing fresh signs of slowdown in the final months of the year the more limited extent of the decline helped to reassure investors.
This gave the GBP/EUR exchange rate room to recover some of the week’s lost ground, especially as both manufacturing and industrial production delivered positive results in December.
Narrowed Eurozone Trade Surplus Could Dent Euro Demand
Confidence in the health of the Eurozone economy could take a fresh blow on Monday with the release of December’s balance of trade and industrial production data.
Forecasts suggest a narrowing of the trade surplus at the end of 2020, reflecting the ongoing global impact of the Covid-19 crisis.
Any such decline could add to fears over the economic outlook, with the currency union already looking set to experience a double-dip recession in the face of the pandemic.
With investors also expecting to see a contraction in the monthly industrial production figure the mood towards the Euro looks set to sour further at the start of next week.
Pound Vulnerable as Markets Brace for UK Inflation Report
Support for the Pound, on the other hand, may prove limited once again as markets brace for Wednesday’s UK inflation data.
If the headline inflation rate fails to impress this could stoke bets that the Bank of England (BoE) could adopt a more dovish outlook in the coming months.
Unless inflation can push higher the case for future BoE policy action looks set to remain, to the detriment of the Pound.
As long as markets see reason to doubt the strength of the UK’s economic resilience during the current national lockdown the potential for greater Pound to Euro exchange rate gains seems limited.