Rising German Consumer Confidence Drags on Pound Euro Exchange Rate
The Pound to Euro (GBP/EUR) exchange rate slumped sharply in the wake of an improved Germany GfK consumer confidence index.
While forecasts had pointed towards a modest uptick in the sentiment index the figure picked up from 15.5 to 12.9 for March, bettering forecasts of a -14.3 reading.
This suggests that confidence within the Eurozone’s powerhouse economy has started to improve before the end of the first quarter, something which could help to limit potential economic damage.
If German consumers show increased optimism this may lead to higher levels of consumer spending and service sector activity, reducing any potential drag on the first quarter gross domestic product.
As February’s Eurozone economic sentiment index also bettered forecasts, rising from 91.5 to 93.4, this added to the appeal of the Euro (EUR).
Fading Optimism over UK’s Covid-19 Vaccine Rollout Limits Pound Appeal
Support for Pound Sterling (GBP) proved generally limited today, in the absence of any fresh UK economic data releases.
As markets’ earlier sense of optimism over the pace of the UK’s Covid-19 vaccine rollout started to fade GBP exchange rates were left on a softer footing.
Following the major gains made over the course of recent weeks the Pound became vulnerable to correction selling, ceding back some of its recent bullish run.
With the prospect of a potential second quarter economic recovery also priced into GBP exchange rates following Monday’s government announcement there was little room left for Pound demand.
Negative French and Spanish Inflation Forecast to Weigh on Euro
Even so, the Pound to Euro exchange rate may still find some support ahead of the weekend on the back of the latest Spanish and French inflation figures.
With both expected to show a negative reading on the month in February the appeal of the Euro looks set to sour once again.
While the German inflation rate returned to positive territory at the start of the year any fresh deterioration in either the French or Spanish rates could weigh heavily on EUR exchange rates.
As long as inflationary pressure across the currency union remains lacklustre the case for any increase in European Central Bank (ECB) hawkishness looks set to diminish.
With the central bank on course to maintain a dovish stance for the foreseeable future the single currency may struggle to find any further traction on Friday.
Resilient UK Housing Market Set to Limit Pound Exchange Rate Downside
On the other hand, demand for the Pound could pick up in response to February’s Nationwide housing prices index report.
Investors expect to see price growth pick up 0.2% on the month, suggesting a sustained degree of resilience within the UK housing market.
As higher levels of housing market activity have helped to shore up the wider economy in the last year, somewhat offsetting the impact of service sector weakness, a positive showing here could lift the Pound.
However, if the market shows signs of starting to slow in anticipation of the end of the current stamp duty holiday this could leave the Pound to Euro exchange rate vulnerable to further losses.