Surprise Uptick in UK Inflation Dents Pound Sterling Euro (GBP/EUR) Exchange Rate
February’s UK consumer price index failed to offer the Pound Sterling to Euro (GBP/EUR) exchange rate a rallying point, surprising investors with an uptick in inflationary pressure.
Rather than holding steady at 1.8% as forecast the CPI accelerated to 1.9% on the year, pushing inflation closer to the Bank of England’s (BoE) 2% target.
Even so, the increase has a detrimental impact on domestic wage growth, eroding some of the improvement seen in Tuesday’s average weekly earnings figures.
With households facing a slightly smaller increase in wages the mood towards Pound Sterling (GBP) remained bearish.
News that Theresa May only intends to ask for a short extension of the Article 50 deadline put additional pressure on GBP exchange rates, with investors still lacking clarity over Brexit.
As officials look no closer to a mutually agreeable deal this left the GBP/EUR exchange rate on a weaker footing.
Weaker German Producer Price Index Weighs on Euro (EUR)
Underwhelming German producer price index data limited demand for the Euro (EUR), meanwhile, as prices fell short of forecast in February.
As prices unexpectedly saw a -0.1% contraction on the month this raised concerns over the inflationary outlook, with a weaker producer price index likely to translate into a weaker consumer price index.
This limited the strength of EUR exchange rates on Wednesday morning, with markets seeing little likelihood of the European Central Bank (ECB) returning to a hawkish policy bias in the months ahead.
The mood towards the single currency could sour further on Thursday if the ECB’s latest Economic Bulletin reflects this sense of dovishness.
Confirmation that policymakers remain willing to keep monetary policy looser for longer would expose EUR exchange rates to fresh selling pressure.
Unless the central bank shows signs of greater optimism regarding the economic outlook the appeal of the Euro looks set to diminish.
Uneventful BoE Meeting to Offer Limited Support to GBP/EUR Exchange Rate
No change in policy is expected from the Bank of England (BoE) announcement on Thursday, even in the wake of the stronger inflation data.
Policymakers are expected to leave interest rates on hold in the near term, given the elevated sense of uncertainty surrounding the UK’s future relationship with the EU.
However, the GBP/EUR exchange rate could find support if the BoE demonstrates signs of confidence in the economic outlook.
As long as investors see solid odds of the BoE raising interest rates once again in the months ahead, provided Brexit-based uncertainty eases, the appeal of the Pound is likely to improve.
On the other hand, any evidence of increased caution among policymakers may encourage investors to continue selling out of the Pound.
Without any significant breakthrough on Brexit, meanwhile, the upside potential of the GBP/EUR exchange rate is likely to remain limited.
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