The Euro declined against the Pound on Wednesday after it was weakened by the release of worse than forecast Producer Price Inflation data (PPI) out of Germany and increased speculation that the Bank of England will raise interest rates by the end of this year.
Fears over deflation striking in the wider Eurozone were heightened after data released out of the 18-member currency bloc’s largest economy, Germany suggested further downward risks to the inflation outlook.
According to the data, factory gate prices in Germany declined more than expected last month as energy prices continued to weigh upon the PPI data.
According to the index published by Destatis, prices fell by -0.1% on a monthly basis and declined by -0.8% on a year on year basis.
Economists had been forecasting a flat reading on the month and a drop of -0.7% on the year.
Other data out of the region also weighed as Consumer Confidence out of the Netherlands fell more than forecast to a reading of -6, far worse than the -2 figure forecast by analysts.
The big negative move for the Euro however came after news broke that the Bank of England’s Monetary Policy Committee was divided over an interest rate rise for the first time in more than three years.
The news buoyed the Pound as traders increased their bets for a hike occurring before the end of this year.
‘For two members, in particular, economic circumstances were sufficient to justify an immediate rise in Bank Rate. These members noted that the continuing rapid fall in unemployment alongside survey evidence of tightening in the labour market created a prospect that wage growth would pick up. They noted that it was possible that wages were lagging developments in the labour market to some extent. If that were true, wages might not start to rise until spare capacity in the labour market was fully used up. Since monetary policy, too, could be expected to operate only with a lag, it was desirable to anticipate labour market pressures by raising Bank Rate in advance of them,’ said the BoE minutes.
Policy Committee members Martin Weale and Ian McCafferty both voted in favour of an interest rate increase of 25 basis points from the current record low level of 0.5%.
The other seven members of the nine-person committee voted in favour in keeping rates on hold.
They reasoned that raising rates now would leave the UK economy vulnerable to further weakness in the Eurozone, and other geopolitical risks.
Adding further pressure to the Euro was the release of far worse than forecast Eurozone Construction Output Data. According to Eurostat output tumbled to -2.3% in June, a sharp fall from the preceding months figure of 3.5% and a lot worse than the 8.67% increase forecast by some economists.
Euro to Pound (EUR/GBP) Exchange Rate Forecast
The BoE minutes are likely to support the Pound throughout the rest of the session and should see the GBP/EUR exchange rate remain above the 1.25 level. With Eurozone data set to continue to disappoint, the Pound is likely to regain the ground lost over the past few weeks. The Euro is set to come under increasing pressure as investors raise their bets that the European Central Bank will have to implement new monetary measures if the region is to avoid sliding back into recession.
Euro Exchange Rate News:
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