Pound euro exchange rate: GBP to Advance vs EUR as Deutsche Bank Warn of ECB Action in Feb

By Gary Howes

The euro came under renewed pressure in morning European trade today after inflation data from the Eurozone showed further disinflationary pressure in the region.

The EZ CPI printed at 0.7% versus 0.9% eyed - the second month in a row that the price index has surprised to the downside. Downward pressures were caused mainly by lower energy costs which dropped by -1.2%. The core CPI actually ticked up to 0.8% from 0.7% forecast.

In the wake of the data, converting pounds into euros is done at 1.2160; the euro to sterling exchange rate is thus at 0.8224.

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Markets are, now starting to see falling inflation as one of the key reasons the European Central Bank may look to ease policy in coming months, a negative for the outlook of the euro's value in the short term.

Update: "The trough in inflation remains uncertain. The risk is the tough is lower than expected and a downside surprise gets embedded into weaker inflation expectations. In our opinion, the set of data to emerge over the last month justifies a further easing of the policy stance on 6 February. It is a question of timing. If not February, the easing will be in March, accompanying downwardly revised ECB staff inflation forecasts." - Mark Wall at Deutsche Bank.

"Although ECB officials have steadfastly asserted that the declines in the price levels are temporary, the economic evidence is to the contrary as EZ CPI data has remained under the 1% mark for the past four months indicating that deflationary forces are taking hold in the region. Most troubling of all is the fact that lack of demand has created stagnant employment conditions for most of the EZ periphery," notes Boris Schlossberg at BK Asset Management.

Outlook favours the pound over the euro

The pound to euro exchange rate outlook remains largely bullish. However, this pair is notoriously slow to move and any rush to the 1.22 level will in all likelihood be slow.

Concerning the outlook, we swap the currencies around and use the euro to sterling (EUR/GBP) pairing:

"EUR/GBP consolidates losses above the downtrend channel bottom (0.82100/0.82150). The short term technical indicators are marginally bearish below 0.82400; we continue keeping our bearish view as long as the 21-dma resistance holds (0.82670)," says Ipek Ozkardeskaya at Swissquote Bank.
 
Analysts at ICN Financial meanwhile predict some relief for the euro ahead: "The pair (Euro to Sterling) is testing the support of the Falling Wedge at 0.8205 which is the first protection barrier for our general positive expectations, which initially depends on stability above 0.8160. Therefore, the upside move remains in favor waiting for the breach of 0.8285 to confirm the upside move toward 0.8365 then 0.8410."

Euro continues to find support from current account surplus

The Eurozone’s strongly positive current account surplus has allowed the region to continue to attract investment while deflation fears have brought in yields on sovereign debt, all but eliminating credit risk.

"The overall feeling we have for the Eurozone is that expectations have been put so low that to miss them, the central bank would have to set the continent on fire – beating expectations leads to a resilient currency. We are expecting to see the ECB sit on its hands at its meeting next Thursday," says a note from World First.

Also warning against expecting too much euro weakness is UniCredit Bank:

"Soft German CPI data accelerated the EUR-USD drop below 1.36 yesterday, but given prospects of new sluggish US economic data, we remain prudent about a further slide lower."

Markets: Risk-off on Friday

Europe has followed Asian benchmarks lower, adding to losses that make this month the worst since the middle of last year.

Many investors are, however, applying positive spin; the fact that equities started the year at the most expensive levels in recent memory means that any near-term weakness in demand will help to mitigate fat tail events, where markets not only fall but crash.

"In any event, equities have struggled. And even though money supply change is a critical driver, it must be noted that a significant number of mega-cap firms have missed on earnings and guidance. This means that participants with longer horizons, not too concerned with near-term events, could be less compelled to support prices given the markets ability to keep growing the bottom line," says David White at Spreadex.