Rising Eurozone Inflation Fails to Shore up Euro (EUR) Exchange Rates
A modest uptick in the Eurozone consumer price index for October was not enough to shore up the Euro (EUR), with confidence in the outlook of the currency union still limited.
Although the headline inflation rate continues to run in excess of the European Central Bank’s (ECB) 2% target this is unlikely to encourage any particular sense of policymaker hawkishness.
With the Eurozone economy showing signs of weaker growth momentum the case for monetary tightening has diminished, pushing back the likely timing of any future ECB interest rate hike.
However, markets still see the central bank on target to wind down its quantitative easing programme in December.
As analysts at Danske Bank commented:
‘We lower our 2018 euro area GDP growth forecast to 1.9% based on weak data, but we still look for a small rebound in Q4 to 0.4%, primarily on the back of a recovery in German activity as production bottlenecks in the car industry subside.
‘We do not think the data will ring alarm bells at the ECB as growth remains above potential (1.5%), but it strengthens the case for a downward revision of the GDP growth forecasts at the December meeting.’
GBP/EUR Exchange Rate Looks Vulnerable Ahead of BoE Meeting
Demand for Pound Sterling (GBP) picked up, meanwhile, as investors took a brief break from Brexit-based anxiety.
While there were no fresh developments or visible signs of progress towards a deal GBP exchange rates made a modest recovery on Wednesday morning.
Even though October’s GfK consumer confidence index dipped from -9 to -10 this failed to weigh down the Pound, with the decline in line with market forecasts.
The Pound Sterling to Euro (GBP/EUR) exchange rate looks set to come under renewed pressure, however, as a result of the Bank of England’s (BoE) November policy meeting.
Although no change in monetary policy looks likely at this stage the content of the latest meeting minutes could weigh heavily on the Pound.
If policymakers appear to shift towards a more cautious outlook the GBP/EUR exchange rate is likely to slump, with the prospect of an interest rate hike looking increasingly distant.
On the other hand, evidence of greater hawkish sentiment within Monetary Policy Committee (MPC) may encourage the Pound to gain further ground against its rivals.
Unimpressive Eurozone Manufacturing Data to Limit Euro (EUR) Demand
The Euro could take a fresh dent ahead of the weekend if October’s finalised raft of Eurozone manufacturing PMIs confirm the continued weakening of growth momentum.
Particular focus is likely to fall on the Italian manufacturing figure, with forecasts pointing towards a slip into contraction territory.
As the Italian government’s controversial budget proposal rests on strong growth forecasts any signs of economic weakness could provoke fresh unease among investors.
Until the issue of the Italian budget is settled the Euro looks set to remain under a degree of pressure, especially if domestic data fails to impress.
If Italian politicians and the European Commission show signs of approaching a compromise, however, this may push the Pound Sterling to Euro (GBP/EUR) exchange rate lower.
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