Euro Pound (EUR/GBP) Exchange Rate Rises as UK Inflation Falls to Three-Year Low in December

January 15, 2020 – Written by John Cameron

EUR/GBP Exchange Rate Edges Higher as Bank of England Rate Cut Fears Increase

The Euro Pound (EUR/GBP) exchange rate dipped by around -0.25% today, with the pairing currently trading at €1.167 at the time of writing after UK inflation fell unexpectedly to a three-year low of 1.3% in December.

The Pound (GBP) has struggled now that an interest rate cut from the Bank of England (BoE) now seems more certain, with a flagging economy continuing to bolster the likelihood of policymakers voting for further stimulus measures.

This follows this morning’s speech from Michael Saunders, one of the central bank’s rate-setters and a member of the Monetary Policy Committee (MPC), in which he commented:

‘It probably will be appropriate to maintain an expansionary monetary policy stance and possibly to cut rates further, in order to reduce risks of a sustained undershoot of the 2% inflation target’.

Brexit uncertainty also continues to haunt UK markets today, with the 31st January, when the UK is set to officially leave the European Union, fast approaching.

EUR/GBP Exchange Rate Improves as European Markets Brace for US-China Trade Deal

The Euro (EUR) edged higher against the Sterling as single currency investors feel increasingly optimistic that a US-China trade deal, which is due to be signed off today, could boost the foreign trade-reliant German economy.

However, some of the Euro’s gains have been clipped by today’s release of November’s Eurozone industrial production figure, which fell below forecasts at 0.2%.

Bert Colijn, the Senior Eurozone Economist at ING, commented:

‘Eurozone trade data showed a decline in seasonally adjusted exports for November, which was met by a smaller decline in imports, therefore reducing the trade balance to 19.2 billion euros. The decline in exports was in part due to a wind-down of exports to the UK due to stock building ahead of the initial October 31 Brexit deadline. Overall, the exports environment remained subdued in November.’

Today also saw the release of Germany’s GDP for 2019, which fell to a 6-year low of 0.6%, leaving European markets feeling jittery as the bloc’s powerhouse economy fails to show any signs of recovery.

‘The German economy thus has grown for the tenth year in a row. This has been the longest period of growth in united Germany. However, growth lost momentum in 2019’ the Federal Statistical Office of Germany said in its statement.

EUR/GBP Outlook: Could the Euro Sink on Dovish ECB Statement?

Euro investors will be bracing for tomorrow’s release of Germany’s Harmonized Index of Consumer Prices figure for December, which is forecast to hold at 1.5%. Any signs of improvement, however, could provide a boost for the EUR.

Tomorrow will also see Christine Lagarde, the newly-appointed President of the Europeans Central Bank, deliver a speech. Any signs of dovishness about the bloc’s economy would prove EUR-negative.

Brexit developments will continue to steer the GBP/EUR exchange rate this week. If there are any further obstacles to a UK-EU trade deal on the horizon, we could see the Pound sink on heightened levels of uncertainty post-31st January.

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