GBP/EUR Exchange Rate to Rally? ECB May Attempt to Talk Down the Euro

The Pound to Euro (GBP/EUR) exchange rate is currently trading in a narrow range this morning as markets brace for more notable events later in the week.

At the time of writing, the GBP/EUR exchange rate is trading at around €1.1229, virtually unchanged from this morning’s opening rate. The Euro (EUR) has been on a bit of a tear in recent months, with the single currency having surged to a 32-month high against the US Dollar (USD) at the start of 2021.

But this strength is becoming increasingly problematic for the European Central Bank (ECB), with the stubbornly strong currency repeatedly undermining the ECB’s efforts to bolster inflation in the Eurozone.

The minutes from the ECB’s December policy meeting confirms that this is not lost on policymakers, with the Governing Council warning that the ‘effective exchange rate currently stood at an all-time high and that the recent appreciation could contribute significantly to the subdued inflation outlook’.

With the majority of economists forecasting that the Euro will continue to appreciate against the US Dollar this year, there is speculation that the ECB will need to start to be more aggressive in weakening the appeal of the single currency. Meanwhile, driving movement in the Pound (GBP) tomorrow will be the publication of the UK’s consumer price index (CPI).

The latest CPI release is expected to report that domestic inflation ticked up from 0.3% to 0.5% in December.

While this is still well below the Bank of England’s (BoE) target rate of 2%, the fact that the UK continues to avoid falling into a state of deflation like the Eurozone may be enough to buoy Sterling sentiment.

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