UPDATE – 15:00 12/01/2018: GBP EUR Exchange Rate Rallies as Spain, Netherlands Back Soft Brexit Deal
The Pound Euro (GBP EUR) exchange rate rallied later into the afternoon on news that Spanish and Dutch finance ministers have agreed to work together to push for a Brexit deal that would keep Britain as close to the European Union as possible.
This has pleased investors greatly as it could potentially help eliminate the possibility of a ‘hard’ Brexit – an outcome that investors believe would have dire consequences for the UK economy.
ECB Minutes Reveal Hawkish Intentions, GBP EUR Exchange Rate Slides in Response
The Pound Euro (GBP/EUR) exchange rate tumbled on Friday as markets continued to digest a hawkish shift in the latest European Central Bank (ECB) meeting minutes.
The ECB minutes (released on Thursday) indicated that the central bank is preparing to draw back its crisis-era stimulus measures faster than markets initially expected, a measure that would indicate increased confidence in the Eurozone’s ongoing recovery.
The language change employed in the minutes was characteristically subtle, with the bank simply swapping the words ‘recovery’ with ‘expansion’.
This proved sufficient in bolstering the single currency, however.
On the data front for the UK things are rather sparse, with markets predominantly stuck waiting for the upcoming US inflation release whilst digesting yesterday’s gloomy impact assessment from Cambridge Econometrics.
German Coalition Leaders Reach Breakthrough in Talks, EUR Exchange Rates Bolstered
Political leaders in Germany reached a reported breakthrough in coalition talks yesterday, with German Chancellor Angela Merkel’s Christian Democratic Union (CDU) and Martin Schulz’s Social Democrats (SPD) seemingly making progress in negotiations.
This came in the form of new blueprints for which formal coalition talks will operate.
It should be pointed out, however, that a new government will still not likely be sworn in until late March at the earliest, effectively leaving Germany without a fully functioning government for some time.
Nonetheless, the existence of the blueprint was greeted positively as markets.
GBP/EUR Exchange Rate Forecast: Markets Prepare for Imminent US CPI Release
The Pound Euro (GBP/EUR) exchange rate could become increasingly volatile in the next few hours depending on the result of the imminent, highly anticipated US consumer price index figures.
The headline, year-on-year, December consumer price index reading is expected to print at 2.2%, consistent with the previous period’s reading.
The core reading, however, is expected to inch ahead year-on-year from 1.7% to 1.8%.
Whilst this is still below the central bank’s target of 2%, the event could still further solidify expectations of three US Fed rate hikes this year.
This eventuality could siphon demand away from major currencies like the Euro and the Pound.
Looking further ahead, next week will feature the UK’s consumer price readings for December along with the UK’s retail price index figures and producer price index numbers.
Markets will be keen to assess the UK’s inflation readings in particular, with recent mixed remarks from Deputy Governor Ben Broadbent stressing weak consumer borrowing, but still asserting that ‘another two or three’ rate hikes are possible.
This has left the monetary policy outlook for the Bank of England (BoE) rather mixed.