GBP to EUR: Will a 0.3% Eurozone CPI Inflation Print Persuade the ECB to Unleash a QE Bond-Buying Programme?
The Pound to Euro exchange rate (GBP/EUR) struck a fresh fortnightly high of 1.2597 yesterday as geopolitical concerns continued to weigh on Eurozone growth prospects.
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Investors were primed for a day of potentially significant German data, however, it was news out of the Ukraine which drove GBP/EUR trading patterns yesterday.
The German data failed to make a lasting impact on the single currency because it largely printed inline with economists’ forecasts.
The German unemployment rate held firm at 6.7% and the German CPI inflation score printed at 0.8%. The only surprise was that -2,000 people fell out of work in the German economy, disappointing estimates of a 5,000 gain.
The Ukrainian crisis, however, had a protracted impact on the Euro as investors reacted to a statement from Ukrainian President Petro Poroshenko claiming that Russian troops had entered the south-eastern town of Novoazovsk.
The revelation caused Poroshenko to cancel a trip to Turkey and the President was forced to confer with defense chiefs regarding, what he described as, the ‘rapidly deteriorating situation’ in the south-east of the country.
The latest developments prompted talk among Ukrainian soldiers of an ‘open war of Russia against Ukraine’, which spooked investors out of the Euro due to fears that stricter sanctions could follow.
The Eurozone economy is already suffering from Russia’s decision to ban food imports from the EU and economic sentiment has taken a decided turn for the worse since the crisis begun.
If the fighting continues then there is a strong possibility that growth in the currency bloc could be negatively impacted. Russia currently supplies around 30% of Europe’s oil and if the pipeline were to be cut then the consequences could be severe.
The Eurozone’s deteriorating growth outlook is liable to increase policymakers at the European Central Bank’s desire to unleash a sovereign bond-buying programme, as this could help drive investment out of safe haven bonds and into the real economy.
Last week’s Jackson Hole speech from ECB President Mario Draghi raised the prospect of further easing from the central bank. However, an ECB official told Reuters on Wednesday that the ECB would not consider a bond-buying programme in September unless the Eurozone consumer price index suffered a steep decline.
Eurozone inflation is currently running at 0.4% and the CPI is expected to fall to a fresh 4.5-year low of 0.3% later this morning.
The latest ECB comments suggest that an inflation rate of 0.3%, though precipitously close to stagnation, would not be enough to prompt officials to announce a quantitative easing scheme at the bank’s monetary policy meeting next Thursday.
However, if the Eurozone consumer price index disappoints the median market forecast and falls below 0.3% then the single currency will likely depreciate versus the Pound as ECB stimulus bets increase.
A weak inflation score could bring July’s GBP/EUR yearly high of 1.2699 back into focus.