Pound Sterling to Euro Foreign Currency Exchange Rate Forecast – Inflation moderates…


By Jon Beddell

Foreign Currency Market Update – GBP / EUR Update

Pound Sterling to Euro Foreign Currency Exchange Rate Forecast - Inflation moderates...

The data calendar kicked off last week with EU producer price index coming in at 6.7%, slightly higher than expected. Then came retail sales for the euro zone, up 1.1% on the year when expectations were for no change. The Euro crept higher on these figures, threatening to complete the unravelling of Sterling’s strong run in early May. Things started coming unstuck for the Euro on Wednesday with German industrial production showing a 0.6% decline against an expected 0.2% rise. This was all small beer though ahead of Thursday’s twin interest rate meetings. Both central banks kept rates on hold as expected, but ECB president Jean Claude Trichet trotted out the phrase “strong vigilance”, code for “we will raise interest rates next month”. Despite the signal the Euro actually fell on the day after JCT failed to reassure on the Greek bailout. Investors are struggling to understand how Greece will avoid default and a major restructuring of debt in what essentially would be a sovereign IVA. This spectre is more than offsetting the perceived benefit (to the Euro) of the interest rate tightening bias, leaving Sterling with at least some chance of resuming the progress it was making in early May.

In the UK industrial production fell 1.2% on the year, compared to expectations of no change. That was largely accounted for by a 1.7% fall in the month of April. Inflation data showed a moderation in both retail prices (up 5.2%) and core price inflation (up 3.3% compared to 3.7% last time), both figures being below expectations. This didn’t really dent Sterling because no one was expecting the Bank of England to raise interest rates anyway.

The technical outlook remains precarious. Although we have seen a bounce over the last week one should note that we lost four cents in six days over month end, and have only gained two cents in the last six days, which leaves a question mark over which currency has momentum in its camp. Buyers of the Euro should hedge their bets by covering at least half of any requirement now.

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