EUR/GBP Exchange Rate Rises as Eurozone Inflation Rises above Forecasts

May 31, 2018 - Written by Tim Boyer

STORY LINK EUR/GBP Exchange Rate Rises as Eurozone Inflation Rises above Forecasts

On Wednesday, the Euro to Pound (EUR/GBP) exchange rate opened in the region of 0.8705 and closed up higher around 0.8781.

In the bigger picture, this only represented a recovery for the Euro which has struggled recently because of Italian political instability.

Ironically, Italian news was behind yesterday’s Euro rise because of a change in perceptions about the stability of the Italian economy.

In a bid to secure funds and reassure rattled investors, the Italian government offered its highest return rates on bonds in four years, resulting in €5.6bn worth of bonds being sold.

Identifying these sales as a sign that confidence in the Italian economy is still high, Seema Shah of Principal Global Investors said:

‘Demand at today's [bond] auction was very encouraging, and clearly indicates that investors still have faith in the Italian economy, if not the government.

‘Italy is unlikely to face major refinancing problems in the near term.’

In terms of Eurozone economic data, yesterday was also positive because of German unemployment and inflation rate readings for May.

The German unemployment rate shifted from 5.3% to 5.2%, a 28-year low. Inflation was also supportive by showing above-forecast growth for the preliminary readings.

There was no real high-impact UK economic data out yesterday, which left the Pound vulnerable to continued uncertainty about the nation after Brexit.

The latest concerns have been about trade with the EU – the issue is that if solid post-Brexit trading agreements aren’t formed soon, there could be a rush for any kind of arrangement as the October deadline draws near.

A statement from the European Round Table of Industrialists (ERT) emphasised these concerns:

‘The uninterrupted flow of goods is essential to both the EU and UK economies.

‘This must be frictionless as with a customs union. We need clarity and certainty, because time is running out. Uncertainty causes less investment.’

Faster Pace of Eurozone Inflation Pushes EUR/GBP Exchange Rate Higher Today

In a similar situation to Wednesday, the Euro (EUR) has advanced against the Pound (GBP) today thanks to better-than-expected inflation rate data for the Eurozone.

Price growth estimates for May see a rise from 0.7% to 1.1% for the core annual reading, along with a base annual increase from 1.2% to 1.9%.

The core reading is the more accurate of the two, as it removes volatile factors such as changes to fuel and food costs.

With that in mind, the European Central Bank’s (ECB) inflation target of 2% is still some way off, but both of today’s readings have still supported the single currency against Pound Sterling.

Predicting that these results wouldn’t immediately lead to any action from the ECB, David Zahn of Franklin Templeton said:

‘With growth continuing to slow...and now this [Italian] political risk in the Eurozone, until there is some resolution we believe it’s unlikely the ECB will stop quantitative easing.

‘This reinforces our view that the bank will extend the asset-buying program into 2019 and the likelihood of [interest] rate hikes will now be pushed out much further into the future.’

Elsewhere, the Eurozone unemployment rate has printed at 8.5% in April; March’s reading was revised up to 8.6%.

Negative UK Consumer Confidence Reading Leaves GBP/EUR Exchange Rate Soft

Although there has technically been good news out of the UK today, the Pound (GBP) has still fallen against the more desirable Euro (EUR).

UK economic data has been the GfK consumer confidence reading for May, which improved with a move from -9 points to -7.

Putting the figures into context, GfK’s Joe Staton said:

‘These negative economic scores are depressing the overall index and preventing it from breaking out into positive territory. We have been at zero or negative for 29 months now.

‘When will the strong jobs market and rising real incomes, coupled with ongoing low interest rates and low levels of headline inflation, have an impact?

‘With UK retail sales falling at their sharpest rate since the mid-90s, tough trading conditions for Britain's hard-pressed retail sector continue to take their toll.’

EUR/GBP Exchange Rate Forecast: Are Euro Losses ahead on Falling PMI Readings?

The Euro’s (EUR) recent advance against the Pound (GBP) could fall through before the weekend, when high-impact manufacturing sector data is released on Friday morning.

Although French manufacturing output is tipped to rise, both German and overall Eurozone readings are forecast to show sliding activity.

A EUR/GBP exchange rate slowdown isn’t inevitable, however, as the UK’s manufacturing PMI for May is also predicted to fall tomorrow morning.

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TAGS: Euro Pound Forecasts