Due to recent uncertainties in the UK, the Euro has made a significant advance against the weakened Pound.
If these gains are to be lasting, Euro traders might start to rely on inflation reports for the overall Eurozone.
Higher Eurozone Inflation may bring Clear Euro to Pound Rise in Future
An estimate of higher-than-expected Eurozone inflation in 2018 has failed to enable a Euro to Pound rally today, with the Euro instead seeing a small loss against Sterling.
This outlook has come from Ewald Nowotny, a policymaker at the European Central Bank (ECB). Giving a minimal but notable statement, Nowotny said;
‘I think that inflation rates in 2018 might be higher than anticipated now because what we see is that energy prices are moving up’.
In the event that Eurozone inflation does rise above forecasts in the coming year, the Euro may steadily appreciate against the Pound.
This is because inflation is considered a key index for the ECB when it holds policy meetings throughout the year.
Higher inflation generally puts greater pressure on the ECB to consider an interest rate hike, although other factors such as wage growth and GDP also come into play.
Recent Eurozone inflation rate figures showed a slowdown for both the basic and core readings in October.
In 2017 overall, inflation has only come close to the ECB’s ‘on or around 2%’ target twice, landing on 2% in February and hitting 1.9% in April.
If the currency bloc is able to stage a comeback in 2018, this could lead to great inflation across the Eurozone, pushing up the value of the Euro in the process.
This is not impossible, as the new German government is expected to be ready for action by the New Year, potentially causing greater activity in the biggest Eurozone economy.
Will Future Pound Movement be Tied to Brexit Process?
The Pound has recently plummeted against the Euro because of Bank of England (BoE) news; this has been despite the first interest rate hike in over a decade.
Traders had largely factored this rate hike in, but were highly disappointed by the implication that there might not be any more rate hikes for a long time.
In a press conference after the rate hike was announced, BoE Governor Mark Carney warned that;
‘[Brexit is causing] businesses and households [to] think about the future, think about their investment plans, [their] spending plans.
It will certainly have an impact on a range of financial asset prices, notably the exchange rate. And we as a committee will have to step back and assess the new outlook and calibrate policy appropriately’.
This has meant that if Brexit talks appear to be going well, the BoE might consider another interest rate hike before too long.
On the other hand, however, further delays and suggestions of a large ‘exit bill’ might bring a more dovish outlook from policymakers.
This might reflect onto the Pound – optimism about Brexit could inspire a GBP/EUR advance, while pessimism might see a Pound to Euro slide.
Recent Interbank EUR GBP Exchange Rates
At the time of writing, the Euro to Pound (EUR GBP) exchange rate was trading at 0.8915 and the Pound to Euro (GBP EUR) exchange rate was trading at 1.1216.
Comments are closed.