GBP EUR Exchange Rate Remains Under Pressure in Spite of Higher UK Inflation

August 15, 2018 – Written by Ben Hughes

The Pound Euro (GBP/EUR) exchange rate struggled to find any fresh traction on the back of July’s UK consumer price index, in spite of the headline figure strengthening.

While inflation accelerated to 2.5% on the year, in line with market forecasts, this was not enough to shore up Pound Sterling against its rivals.

As the monthly measure of inflation stagnated investors saw limited cause for confidence on Wednesday morning, especially in the wake of recent UK average weekly earnings figures.

With wage growth already faltering the latest uptick in price pressures did little to improve the outlook of GBP exchange rates.

Rising Inflation Fails to Boost Pound Sterling Demand

In spite of the uptick in the headline inflation rate there are doubts that price pressures will continue to strengthen in the months ahead.

Although inflation is still running above the Bank of England’s (BoE) 2% target rate the chances of any further monetary tightening still appear limited.

As Brexit-based uncertainty continues to cast a shadow over the economic outlook and domestic data generally underperforms the case for another interest rate hike remains nebulous at best.

James Smith, Developed Markets Economist at ING, noted:

‘Importantly, fuel costs have begun to stabilise, and the price of petrol, in fact, fell by 0.6% last month. Barring any further gyrations in oil prices, we think July’s figure represents a peak, and we expect CPI to begin trending downwards over the next few months gradually.

‘The impact of the Pound’s post-Brexit plunge is continuing to fade – prices have more-or-less adjusted to the weaker level of Sterling – and this is seeing core goods inflation slow. We expect this to keep core CPI close to 2% for the foreseeable future, although there’s a risk that this slips lower.

‘For the Bank of England, this is likely to be another argument to remain on the sidelines for the next few months, as Brexit uncertainty becomes an increasing concern.’

However, GBP exchange rates could find a rallying point tomorrow if July’s retail sales data proves encouraging.

Evidence that consumer spending has picked up after the weakness seen in June would give the Pound a solid boost against its rivals.

On the other hand, another weak months of sales would highlight the more vulnerable nature of the economic outlook, to the detriment of Sterling.

Widened Eurozone Trade Surplus Forecast to Dent Pound Euro Exchange Rate

Demand for the Euro is likely to remain muted until the Turkish financial crisis shows signs of dying down, given the risks that the weaker Turkish Lira still poses to the European banking system.

If the situation in Turkey continues to escalate, though, EUR exchange rates could see further weakness.

The single currency may yet find support on the back of June’s Eurozone trade balance figure, with forecasts pointing towards the surplus widening from 16.5 billion to 18 billion.

Investors would greet any evidence that the Eurozone economy shrugged off US protectionism and rising global trade tensions, even though confidence in the economic outlook remains muted.

As analysts at Mizuho Bank commented:

‘Even though the global economy picked up from the soft patch in the Jan-Mar quarter, the global economy lacks momentum with the exception of the US economy, as evidenced by the slowdown of the Eurozone and Chinese economies in the Apr-Jun quarter.

‘The escalation of trade friction, the spread of concerns regarding the emerging market (EM) economies, Middle East tensions, and the rise of crude oil prices pose risks to global growth.

‘Should US-China trade frictions escalate, it would serve as negative pressures not only upon the US and China but upon the global economy as well.’

Until the global trade situation stabilises demand for the Euro could prove limited, especially given signs of division within the currency union.

This should help to keep the GBP/EUR exchange rate from experiencing significant downside pressure in the near term.

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TAGS: Pound Euro Forecasts