Pound Euro Exchange Rate Gains Limited as UK Inflation Falls Short
Investors continue to find the Pound (GBP) outlook generally appealing, but the Pound Euro (GBP/EUR) exchange rate has been unable to sustain much in the way of gains this week so far. Today’s UK inflation rate report fell short of expectations.
Last week saw narrow movement in GBP/EUR, as the pair edged higher within the interbank region of 1.15 throughout the week.
This week has seen Sterling attempt a slightly bigger advance, and GBP/EUR briefly jumped above 1.16 earlier in the week. However at the time of writing on Wednesday, GBP/EUR is struggling to hold above this key level and remains stuck in the interbank region of 1.15.
Market optimism about the Eurozone outlook is rising. If this continues, the Euro (EUR) could see continued advances against the Pound.
Pound (GBP) Exchange Rates Mixed as UK Inflation Expected to Keep Rising
Today saw the publication of Britain’s March inflation rate report. The inflation figure met forecasts of rising to 0.3% month-on-month, but the yearly figure fell slightly short at 0.7%.
The slightly weaker yearly inflation figure weighed on the Pound and limited its potential for gains today.
Still, Analysts overall expect UK inflation will keep rising in the coming months. However, some analysts warn against betting on a more hawkish Bank of England (BoE) any time soon. This includes Paul Dales, Chief UK Economist at Capital Economics:
‘The rebound in CPI inflation from 0.4% in February to 0.7% in March is the start of a rise that we think will take inflation to around 1.5% in the next few months and above 2.0% by December.
But as we doubt inflation will stick above 2.0% until late in 2023, the Bank of England is unlikely to hike interest rates for a few years yet.’
Euro (EUR) Exchange Rates Benefitting from Vaccination Hopes
The Euro saw poor performance throughout much of the first quarter of 2021. This was because the UK and US coronavirus vaccination rollouts were perceived as much more successful than those of the Eurozone.
However demand for the Euro has been strengthening slightly in recent weeks.
Not only is it benefitting from weakness in rival currencies like the Pound and US Dollar (USD), it is also gaining as markets predict the Eurozone’s own vaccination rollout is about to accelerate.
According to Zach Pandl, Co-Head of Foreign Exchange Strategy at Goldman Sachs:
‘Europe is really the main region which is going to see accelerating vaccinations this quarter. And later in the year, we will see accelerating vaccinations, broadly, in emerging market economies,
The US got ahead of the curve in the first quarter, but other countries are going to be quickly catching up.’
Pound Euro (GBP/EUR) Exchange Rate Awaits European Central Bank (ECB) Decision
The Pound to Euro exchange rate is struggling to mount a bigger advance this week, amid a lack of reasons to keep buying Sterling higher.
If investors are given more reason to buy the Euro, GBP/EUR could be in for losses instead.
Tomorrow will see the European Central Bank (ECB) hold its April policy decision. The bank is expected to leave monetary policy frozen, but any sign that the bank is becoming more optimistic on the Eurozone outlook could make investors more optimistic as well.
For example, if the ECB shows optimism in the Eurozone’s vaccination program it could make investors more likely to buy the Euro on vaccine optimism.
If upcoming Eurozone data impress, such as confidence stats tomorrow and PMI projections on Wednesday, the Euro could be even more likely to mount an advance in the coming weeks.
As for the Pound, it is unlikely to strengthen much unless there is an upside surprise in upcoming UK data. UK retail sales and PMI projections are due towards the end of the week and could influence the Pound Euro (GBP/EUR) exchange rate.