Pound to Euro: Euro Pressured by Prospect of Dollar-Parity

The British pound is down against the euro on Wednesday afternoon with the euro pressured by soft construction data while a faster than expected pickup in UK inflation is being interpreted as more a of a risk to British consumers than raising the likelihood of a rate hike.

GBP/EUR was lower by 25 pips (-0.20%) at 1.2018 with a daily price range of 1.2007 to 1.2057 as of 2pm GMT. Pound to euro is fluctuating in a 40-pip range above 1.20, leaving a weekly return of -0.22%.

GBP/EUR: Euro, unable to capitalise

While sentiment was strong across European stock markets, the euro was mostly unable to capitalise thanks to more blowout economic data from the United States. The US and European economies seem to be starkly diverging and it is creating volatility in forex markets.  EUR/USD probing 3-year lows below 1.08 is a significant development and is pulling EUR/GBP lower (GBP/EUR higher).

The euro weakness has recalled calls for parity with the US dollar. Markets had been waiting for the so-called ‘hard’ European economic data like industrial orders and GDP to catch up with a bottoming in business surveys after the trade war brought about a contraction. However the onset of coronavirus fears has seen surveys tank again, as highlighted by yesterday’s German ZEW report.

The only economic data of note from the Eurozone was its current account and construction output which fell -3.7% when a rise of 1.4% was expected for December. By stark contrast, US housing permits, used as a proxy for future home construction grew at the fastest pace since 2007. The European economy seems to be heading into reverse, with a recession potentially around the corner in Germany. Meanwhile the United States is going from strength to strength with President Donald Trump and the US Federal Reserve at the rudder.

The pound

Generally stronger than expected inflation data had a more muted effect on the pound than would typically be the case. The concern is that the higher inflation at the same time as wage growth might be peaking out means household budgets get squeezed.

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