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Pound to Euro Exchange Rate Outlook Forecast to Worsen if Eurozone Inflation Beats Expectations

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Pound to Euro Exchange Rate Could Fall if Friday’s Eurozone Data Impresses

Amid Brexit uncertainties and a largely unsurprising UK Spring Statement, the Pound to Euro (GBP/EUR) exchange rate has remained range bound this week and has generally trended closely to the week’s opening levels.

GBP/EUR opened the week at the level of 1.1253 on Monday and has since trended just above the week’s opening levels. The pair briefly hit a high of 1.1295 but has generally fluctuated between that high and the opening levels.

A lack of surprising datasets or even any particularly influential political developments from Britain has given investors little reason to move on the Pound (GBP). Investors are awaiting major Eurozone data before making big moves on GBP/EUR.

The next data that has the potential to affect the Pound to Euro (GBP/EUR) exchange rate outlook in the short term to the long term will be the Eurozone’s final February Consumer Price Index (CPI) results on Friday.

Pound (GBP) Exchange Rates Little Changed Following UK Spring Statement

UK Chancellor Philip Hammond took an upbeat tone when he delivered Britain’s 2018 Spring Statement on Tuesday, despite a comparatively gloomy tone from the independent Office for Budget Responsibility (OBR).

Hammond played up the OBR’s higher 2018 UK growth forecast, which had been revised from 1.4% to 1.5%. The Chancellor forecast that Britain’s current account would finally see a surplus over the next year or so too.

The OBR was less optimistic though. The watchdog noted that Brexit uncertainty was still high and UK growth was forecast to be slower over the next five years.

The group also noted that Britain could be paying off the EU divorce bill off for multiple decades and estimates it will cost the UK over £37b.

Economists and analysts were generally unimpressed with the presentation and argued that despite the Chancellor’s optimism Britain’s growth outlook was poor.

Sterling’s gains against a slightly weaker Euro were limited, as the Spring Statement coupled with persistent Brexit uncertainties gave investors little reason to buy the Pound.

Euro (EUR) Exchange Rates Pressured by European Central Bank (ECB) Dovishness

Last week’s European Central Bank (ECB) policy decision saw ECB President Mario Draghi claim that the ECB outlook had not changed and that a change in language had been forecast for a while already.

His comments were followed up this week by dovish remarks from ECB executive board member Benoit Coeure.

Coeure stated that Eurozone interest rates were likely to remain low until well after quantitative easing (QE) had been withdrawn. This doused hawkish market speculation and left the Euro weaker, making it easier for GBP/EUR to edge higher this week.

Euro trade has been largely unaffected by Eurozone data this week so far. Spain’s inflation data and Germany’s inflation results both met market expectations.

Pound to Euro (GBP/EUR) Forecast: Outlook to Worsen if Eurozone Inflation Impresses

While Eurozone data has been unsurprising this week so far, upcoming inflation stats due on Thursday and Friday still have the biggest potential to influence Pound to Euro (GBP/EUR) exchange rate movement this week.

French Consumer Price Index (CPI) results will be published on Thursday, followed by Italian inflation and the Eurozone’s overall February inflation stats on Friday.

Analysts currently expect Eurozone inflation to have risen from -0.9% to 0.2% month-on-month, but have slowed from 1.3% to 1.2% year-on-year. Yearly core inflation is projected to remain at 1%.

If any of the inflation results (particularly core inflation) beat expectations, the Euro is likely to see stronger demand.

Higher inflation would boost speculation that Eurozone price pressures were improving quicker than expected and that the ECB may need to tighten Eurozone monetary policy sooner. This would leave the Euro stronger in both the short-term and long-term.

The Pound’s trajectory is unlikely to change notably in the coming days amid Brexit uncertainty and a lack of UK data due for publication, so GBP/EUR is more likely to be driven by Euro movement.

Sterling investors will be looking ahead to next week, when UK inflation results will be published and markets hope for a UK-EU negotiation breakthrough at the week’s EU summit.

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