Sharp Decline in German Sentiment Weighs Heavily on EUR/GBP Exchange Rate
An unexpectedly sharp decline in October’s German ZEW economic sentiment index left the Euro (EUR) under pressure this morning.
As the index slumped from -10.6 to -24.7 on the month this highlighted the rapidly diminishing confidence in the outlook of the Eurozone’s powerhouse economy.
With global trade tensions still elevated German exports are unlikely to see a significant rebound in the second half of the year, limiting the potential for the economy to recover its earlier growth momentum.
Although August’s Eurozone trade surplus widened further than forecast this was not enough to shore up the Euro to Pound Sterling (EUR/GBP) exchange rate today.
Investors remained wary of buying into the single currency now that the Italian government’s 2019 budget proposal is in the hands of the European Commission.
With EU officials looking set to reject the plans to target a budget deficit of 2.4%, in excess of EU budget rules, EUR exchange rates appear vulnerable to further weakness.
Pound Sterling (GBP) Exchange Rates Benefit as UK Wage Growth Hits 9-Year High
Confidence in Pound Sterling (GBP) picked up, meanwhile, as UK average weekly earnings excluding bonuses bettered forecast to accelerate 3.1% on the year.
Earnings picking up solidly in the three months to August bodes well for UK workers as wages continued to outpace inflation.
With wage growth at its highest level since January 2009 the mood of GBP exchange rates naturally improved.
While the labour market showed some signs of losing momentum this was not enough to boost the EUR/GBP exchange rate at this stage.
However, the Pound could struggle to hold onto its gains for long as tensions over Brexit continue to mount.
If the UK and EU remain at a stalemate GBP exchange rates are likely to return to a downtrend in the days ahead.
Higher Eurozone Inflation Unlikely to Encourage Euro (EUR) Exchange Rate Rally
September’s finalised Eurozone consumer price index is unlikely to offer the Euro any particular encouragement on Wednesday.
Although the data is expected to confirm that inflationary pressure picked up from 2.0% to 2.1% on the year EUR exchange rates could struggle to capitalise on this.
Even though Eurozone inflation is now above the European Central Bank’s (ECB) 2% target the odds of policymakers raising interest rates remain low.
With the Eurozone economy still showing signs of weaker growth momentum the case for tighter monetary policy looks more limited.
As long as worries over the Italian budget proposal continues to hang over markets the Euro to Pound Sterling (EUR/GBP) exchange rate looks set to remain biased to the downside.