Pound Euro Exchange Rate Dented as German Inflation Falls
(Updated: 16:45, 31/1/22) After firming at the start of the this week’s session, the Pound Euro (GBP/EUR) exchange rate dropped in the afternoon below €1.20.
GBP/EUR began to weaken following the release of German inflation data for January that indicated a fall to 4.9% from 5.3% in December.
While the reading was well above forecast of 4.3%, easing inflationary pressure in the Eurozone’s powerhouse economy provided the single currency support by affirming the European Central Bank’s (ECB) stance that price pressures will be transitory.
Meanwhile, the Pound came under pressure after the publication of the report into Downing Street parties by senior civil servant Sue Gray.
The report revealed little and acted as an update on the findings until the Metropolitan Police finishes its investigation into any lockdown breaches before the release of the full inquiry.
With the furore yet to conclude, political uncertainty and doubts over the future of Boris Johnson may weigh on Sterling sentiment.
Pound Euro (GBP/EUR) Exchange Rate Ticks Higher on BoE Rate Hike Expectations
The Pound Euro (GBP/EUR) exchange rate is edging slightly higher at the start of this week’s session, trading above €1.20.
Sterling is firming ahead of the Bank of England (BoE) interest rate decision on Thursday, while remaining sensitive to UK political developments. The wait continues for the report into Downing Street lockdown rule breaches, and cautious optimism surrounds the UK-EU post-Brexit talks on the Northern Ireland protocol.
Meanwhile, the Euro looks under pressure on Monday after GDP data showed slowing Eurozone growth in the fourth quarter of 2021, with more high-impact economic data releases to come.
Pound (GBP) Bolstered ahead of BoE Rate Decision
The Pound (GBP) is consolidating gains made at the end of last week this morning amid an improved market mood and expectations for the BoE to tighten monetary policy at its February policy meeting on Thursday.
Markets widely anticipate the central bank to raise rates to 0.25% from 0.5%, a second rise in as many months.
A rate hike could also signal that the BoE may start to reduce its £875 billion holdings of government bonds purchased through its bond-buying programme to provide support during the pandemic.
Nomura economist George Buckley commented:
“With Governor Bailey’s previously expressed desire to reduce the balance sheet, a move sooner rather than later seems reasonable.”
Meanwhile, the Pound has received some support from optimism over a deal on the Northern Ireland Protocol in February following comments from Ireland’s Minister for Foreign Affairs Simon Coveney.
He said:
“Work to do, but there are landing zones that allow the protocol to be implemented in a way that responds positively to concerns raised in Northern Ireland.”
Euro (EUR) Pressured by Slowing Eurozone GDP
The Euro (EUR) has started this week on the back foot following the release of Eurozone GDP data, although a pullback in the US Dollar is benefitting the single currency due to the negative correlation in the pairing.
Growth in the fourth quarter of 2021 in the Eurozone slowed to 0.3%, meeting forecasts but down on the third quarter’s reading of 2.3%.
The figure indicated the slowest growth through the last three quarters as the Omicron coronavirus variant swept Europe and disrupted economic activity in the bloc.
Some analysts believe growth will remain positive in the first quarter of 2022 as Covid restrictions ease, supply chains recover, and coronavirus infections fall.
However, manufacturing growth may remain pressured, and inflation will remain high and be a threat to consumer spending.
Pound Euro Forecast: GBP/EUR Set for Volatility on Central Banks’ Decisions?
The Pound Euro exchange rate looks set for significant swings this week with central bank interest rate decisions, high-impact Eurozone data and the release of the report into Downing Street parties.
The BoE and European Central Bank (ECB) interest rate decision announcements follow monetary policy meetings on Thursday.
With the BoE expected to raise interest rates, and the ECB to maintain its accommodative stance despite recent policymakers’ comments that inflation may not be transitory, the policy divergence between the two central banks may boost GBP/EUR.
However, forecasts pointing to German inflation having fallen to 4.3% in January, down from 5.3% the month before, may bolster the ECB’s stance that inflation will ease and support the Euro.
A slew of high-impact Eurozone and German economic data releases this week will likely drive additional movement in EUR exchange rates.
Forecast falling Eurozone unemployment for December to 7.1% from 7.2% released on Tuesday, and easing Eurozone inflation for January published on Wednesday that is expected to drop to 4.3% from 5% may bolstered EUR sentiment.
Meanwhile, the report into Downing Street parties may stoke volatility in GBP exchange rates, if Prime Minister Boris Johnson is implicated in any wrongdoing that could then result in a Conservative party leadership content.