As Tuesday’s session progressed the Euro to Pound Sterling (EUR/GBP) exchange rate continued to strengthen as expectations rose that the Bank of England will refrain from raising interest rates due to a run of negative UK economic data releases.
The Euro to Pound Sterling (EUR/GBP) exchange rate firmed as disappointing UK construction PMI data and economist forecasts that today’s UK service sector PMI data will show a decline caused traders to raise their bets that the Bank of England will choose to delay raising interest rates until later in the year.
On Monday the Euro to Pound Sterling (EUR/GBP) exchange rate continued to fluctuate in the 0.78 region as disappointing UK data was matched by a weaker than forecast inflation figure out of the Eurozone’s largest economy.
Earlier in the session the Euro to Pound Sterling (EUR/GBP) exchange rate softened further after data out of Germany came in below economist expectations.
Inflation in the Eurozone’s largest economy slowed to its weakest level since 2009, boosting expectations that the European Central Bank will introduce more monetary measures at this months policy meeting.
The German inflation rate fell to 0.1% in December from 0.5% in November, the Federal Statistics office said.
Earlier the Euro to Pound Sterling (EUR/GBP) exchange rate regained some lost ground on Monday due to the release of softer-than-forecast construction data out of the UK and better-than-expected data out of Spain and the wider Eurozone.
Consumer confidence in Spain increased more-than-expected last month and the Eurozone Sentix Investor sentiment report beat forecasts, giving support to the battered Euro.
Sentix GmbH said that Sentix Euro Zone Investor Confidence rose to a seasonally adjusted 0.9, from -2.5 in the preceding month. Analysts had expected Sentix Euro Zone Investor Confidence to fall -1.0 last month.
Pound Sterling (GBP) Softens on Construction PMI data
The Pound gave up some of its earlier gains following the release of softer than forecast UK Construction PMI data.
The report adds to expectations that the UK economy will experience a slowdown over the coming year as the weakness of the Eurozone weighs.
The data compiled by Markit showed that construction activity in the UK grew at its slowest pace since July 2013 in December. House building remained strong however with residential construction at its strongest level since 1997.
According to Markit the construction PMI fell to a reading of 57.6 last month, down from the 59.4 figure recorded in November.
The figure was well below economist expectations for a figure of 59.0.
Euro to Pound Sterling (EUR/GBP) Exchange Rate Forecast
The Euro to Pound Sterling (EUR/GBP) exchange rate is forecast to weaken further over the coming weeks as speculation continues to build that the European Central Bank (ECB) will soon introduce a quantitative easing programme and as Greeks prepare to vote in an election which could reignite the Euro crisis.
Last week, European Central Bank President Mario Draghi suggested that the ECB would begin quantitative easing soon in an effort to stimulate economic growth and tackle the threat posed by deflation.
‘The reasons to be selling the Euro were pretty clear over the weekend: Draghi being a step closer to QE and deepening concerns about the Greek political situation,’ said Sean Callow, a currency strategist at Westpac Banking Corp.
If quantitative easing is introduced the Euro, will likely fall sharply against Sterling and other major peers.
On Monday, the single currency declined to a fresh nine-year low against the US Dollar. The US currency is gaining strength due to the diverging economic policies of the Federal Reserve and ECB.
The Euro could also give up earlier gains against Sterling if German Inflation data comes in worse than expected.
