- Mixed German trade data weighed on Euro – Investors discouraged by signs of economic weakness
- Finalised German CPI showed no change – EUR/GBP exchange rate trended higher in response
- Better-than-expected UK construction figures failed to boost Pound – Worries persist over the outlook of the domestic economy
- ‘Brexit’ worries predicted to bolster EUR/GBP exchange rate – Uncertainty to weigh heavily on Pound ahead of referendum
Euro (EUR) Struggled to Make Gains on Flat German Export Growth
Safe-haven demand was on the rise on Thursday, following a weaker-than-expected Chinese Consumer Price Index figure. Inflation in the world’s second largest economy continued to fall back in May and investors were prompted to pile into lower-yielding, lower-risk currencies such as the Euro (EUR). However, this was not enough to put the single currency on a bullish run, in spite of the day also seeing seemingly positive German trade data. While Germany’s trade surplus failed to narrow as far as forecast this was overshadowed by a disappointing stagnation in exports, which suggested that the Eurozone’s powerhouse economy remains under pressure.
While the Pound (GBP) was initially weighed down by a particularly poor RICS House Price Balance, which weakened from 39% to 19% in May, it was not long before the currency began to rally. Confidence in Sterling was shored up by an unexpectedly improved UK trade balance, as the deficit was found to have narrowed in April. This would seem to indicate that ‘Brexit’ uncertainty has not been weighing on the domestic economy as feared, particularly as goods exports showed an unprecedented monthly increase of 11.8%.
Stronger UK Construction Figures Failed to Dent EUR/GBP Exchange Rate
There was no surprise in the finalised German Consumer Price Index for May, as inflationary pressure was confirmed to have risen to 0.1% on the year. This offered some renewed support for the single currency, raising hopes that the recent policy easing of the European Central Bank (ECB) could be having a tangible impact on the domestic inflation outlook. With the central bank’s corporate bond buying program underway, investors remain fairly confident that interest rates are unlikely to be lowered in the near future, keeping the Euro on a stronger footing against rivals.
UK Construction Output strongly bettered expectations on Friday morning to rise 2.5% on the month in April. However, although the year-on-year contraction in output was more limited than investors had anticipated, signs of weakness remain in the sector. Consequently this upside surprise was not enough to boost the Pound, allowing the Euro to Pound Sterling (EUR/GBP) exchange rate to continue making gains ahead of the weekend.
With most investors focusing on the latest developments in the EU referendum, UK data releases are having less of an impact on demand for the Pound, with even better-than-forecast ecostats providing minimal support.
EUR/GBP Exchange Rate Forecast: ‘Brexit’ Volatility Predicted to Hamper Pound
As the EU membership referendum draws nearer ‘Brexit’ worries are expected to continue exerting downside pressure on the Pound, particularly if the polls continue to point towards heightened ‘Leave’ campaign support. As Peter Dixon, research analyst at Commerzbank noted:
‘There is a view in certain parts of the market that this race is run, but nothing could be further from the truth, and the ongoing decline in Sterling risk reversals suggests that the currency markets remain on edge. The outcome of the referendum is likely to be very close, and with two key political debates to come this month, on 15 and 21 June, there is still plenty of scope for additional twists.’
Should Monday’s raft of Chinese data reveal additional signs of weakness within the world’s second largest economy investors could continue to flock into the Euro. Commentary from members of the ECB is unlikely to prompt particular volatility for the single currency in the coming days, as doubts remain over the central bank’s ability to ease policy further.
Current EUR, GBP Exchange Rates
At the time of writing, the Euro to Pound Sterling (EUR/GBP) exchange rate was trending higher around 0.7828, while the Pound Sterling to Euro (GBP/EUR) pairing was slumped in the region of 1.2777.
