Pound Euro (GBP/EUR) exchange rate rebounds amid sinking German industrial output

The Pound Euro (GBP/EUR) exchange rate is trapped in a narrow range this morning following mixed central bank commentary and weak German data.

At the time of writing the GBP/EUR exchange rate is trading at around €1.1732, virtually unchanged from this morning’s opening rate.

Euro (EUR) wavers despite downbeat data

The Euro (EUR) is mixed against its major peers this morning following an unexpected slump in Germany’s latest industrial production data.

German industrial output fell by 1.6% month-on-month in December, more than market forecasts of a 0.4% contraction. Further confirmation that the industry-heavy German economy remains weak will likely weigh on EUR sentiment as the session continues, as the European Central Bank reiterates its data driven approach.

Hernández de Cos, member of the Governing Council to the European Central Bank commented on Tuesday evening:

‘It is crucial for European citizens to know that we are optimistic that the next move will be an interest rate reduction. Still, I believe it is appropriate not to be exact about when this will happen because that will depend on the data.’

As such, a week of downbeat economic reports for the Eurozone may see investors pulling their interest rate cut bets forwards.

Pound (GBP) strengthens amid dip buying

The Pound (GBP) is firming against most of its major peers this morning, though is currently trading without a clear direction against the Euro.

Sterling caught bids overnight as investors bought the dip following GBP’s dovish losses, buoying the Pound against its stronger peers. Further commentary from Bank of England policymaker Sarah Breeden this morning is underpinning GBP’s recent rebound.

Breeden said during a speech this morning:

‘As I have become more confident that persistence is likely to evolve as embodied within our forecast, I have become less concerned that rates might need to be tightened further. Instead my focus, and indeed the focus of many on the MPC, has shifted to thinking about how long rates need to remain at their current level.’

As BoE policymakers remain seemingly on the fence as to when rates may begin falling, the possibility of rates remaining ‘higher for longer’ may serve to support GBP as the session continues.

Pound Euro exchange rate forecast: central bank commentary to drive volatility?

Looking ahead speeches from European Central Bank policymakers Pierre Wunsch, Frank Elderson and Philip Lane could drive EUR volatility amid a lack of economic data releases tomorrow. Should any of the policymakers express that the central bank may continue to hold interest rates into the summer months the Euro could hold steady.

However, following a dovish pivot last night from Bank of Spain Governor Hernández de Cos, any additional suggestion of imminent rate cuts may see the common currency falter.

Looking to the UK, a data light session also leaves GBP vulnerable to policymaker comments. BoE dove Swati Dhingra and opposing hawk Catherine Mann are due to speak tomorrow. Conflicting commentary from oppositional rate-setters may serve to drive GBP volatility, while simultaneously muddying the waters surrounding when rate cuts may occur in the UK.

On Friday, the latest German inflation data will likely be the core catalyst of EUR movement. Economists expect that January’s year-on-year inflation report will cool to 2.9%. Gradually cooling inflation may serve to boost ECB rate cut bets, sinking the common currency as the week draws to a close.

Yasmine Arasteh

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