Euro to Pound Exchange Rate Could Recover Week’s Losses if Eurozone Inflation Beats Expectations
A lack of impressive Eurozone data, as well as dovish commentary from European Central Bank (ECB) officials, has left the Euro to Pound (EUR/GBP) exchange rate unappealing this week so far.
Its losses have been modest though due to weakness in the Pound (GBP). EUR/GBP opened the week at the level of 0.8885 and touched on a March low of 0.8844 on Thursday morning.
The pair trended closer to the level of 0.8860 at the time of writing, after the Euro (EUR) was supported by some strong growth stats from Ireland.
As the Euro to Pound (EUR/GBP) exchange rate’s movement has been so limited this week, the pair could easily recover on Friday if Eurozone inflation data beats expectations.
Stronger than expected Eurozone inflation would boost market hopes that the ECB could see a hawkish shift in tone sooner than expected.
Euro (EUR) Exchange Rates Slip on European Central Bank (ECB) Dovishness
Over the past week, the European Central Bank (ECB) has ramped up its dovish commentary in attempt to keep pressure on the strong Euro and prevent investors from becoming too hawkish on the bank’s changes in tone.
On Wednesday, ECB President Mario Draghi held a speech in which he indicated the bank would approach the end of quantitative easing (QE) with caution and patience.
He said that the bank could continue its bond buying scheme so long as Eurozone inflation remains subdued and the bank would wait for inflation to see more sustained pressure before stopping completely.
This disappointed hawkish investors hoping that the ECB monetary policy outlook was becoming more hawkish.
However, the Euro held above its weekly lows on Thursday as investors were impressed by Ireland’s Q4 Gross Domestic Product (GDP) results, which came in higher than expected.
Irish growth was forecast to come in at 2.6% quarter-on-quarter but instead printed at 3.2%. The previous figure was revised higher too, from 4.2% to 4.8%. Yearly growth slipped from 10.9% to 8.4%.
Pound (GBP) Exchange Rates Lack Support as Brexit Uncertainties Persist
Investors have had little reason to buy Sterling this week as uncertainties about Britain’s economic outlook amid the Brexit process have persisted.
EUR/GBP losses were largely due to ECB dovishness causing Euro weakness, rather than any particular support for Pound trade.
Sterling was slightly supported by the optimistic tone the UK Treasury took in Tuesday’s Spring Statement, but analysts and the independent Office for Budget Responsibility (OBR) remained gloomy, limiting Pound appeal.
Pound investors are also concerned that disagreements between the UK and EU could continue throughout next week’s EU summit and that this could weigh on the chances of a transition period deal being agreed.
Euro to Pound (EUR/GBP) Forecast: Eurozone Inflation Could Boost Euro Demand
It is still possible for the Euro to Pound (EUR/GBP) exchange rate to recover this week’s minor losses and advance, if Friday’s Eurozone data beats expectations.
The Eurozone’s February Consumer Price Index (CPI) results are forecast to have improved from -0.9% to 0.2% month-on-month and have slowed from 1.3% to 1.2% year-on-year. The yearly core figure is expected to remain at 1%.
If Eurozone inflation beats market expectations, the Euro will see stronger demand as investors will speculate that inflation is becoming more sustained faster than the ECB expects.
However, if inflation simply meets expectations as most Eurozone data has this week, EUR/GBP could remain lower. Weaker inflation would make the Euro even less appealing and lead to an EUR/GBP fall.
Next week will be a major one for the Euro to Pound exchange rate, particularly the Pound.
Major UK data will be published including inflation, wage growth and retail sales. The Bank of England (BoE) will also hold its March policy decision next Thursday.
The biggest event of the week though, is likely to be the EU summit taking place from the 22nd to the 24th of March. The UK government hopes to secure a post-Brexit transition period agreement during the summit.
If this agreement is achieved, the Euro to Pound (EUR/GBP) exchange rate is forecast to fall next week.