The pound to euro interbank exchange rate strengthened this week, at one point hitting its highest in 2020 so far. In part, this is because the UK’s business confidence surveys for this month show a rise in optimism, following last month’s general election. This bodes well for tomorrow’s crucial PMIs (Purchasing Managers’ Indices) and may help convince the Bank of England (BoE) to keep interest rates steady at 0.75%, rather than cutting them, which generally would support the pound.

Turning to the Eurozone meanwhile, the common currency has lost out this week, even though both Germany and the euro bloc’s economic sentiment has improved. In particular, companies on the continent feel more upbeat, following news that the USA and China have signed a “first phase” trade deal. During the last 18 months or so, this has been an albatross around the Eurozone economy’s neck, even though the euro bloc is a third party to the trade dispute.

Eurozone Recovery Gathers Pace but Inflation Remains a Concern

German, Eurozone business confidence rises

In particular, this week we learnt that Germany’s economic sentiment climbed to 26.7 in January, according to respected watchdog ZEW. This is well ahead of financial market forecasts for 15, as well as December’s result of 10.7. Meanwhile, in the wider Eurozone, ZEW economic sentiment increased to 25.6 this month, far above December’s result of 11.2, as well as economists’ forecasts for 5.5.

So these statistics indicate that companies in Europe feel far more confident at the start of 2020, compared to the month before. We’ll see if this confidence is reflected in the Eurozone’s PMIs (Purchasing Managers’ Indices) for January, the first concrete indication of the bloc’s economic performance this year, when they’re released today at 09.00 GMT.

European Central Bank holds interest rates

Meanwhile, the European Central Bank (ECB) held interest rates at 0.0% this week, as widely forecast. In part, this is because the bloc’s inflation stands at 1.0%, well below the objective. Also, the Eurozone’s central bank announced further details of its strategic review, in which it will assess whether its 2.0% inflation target is appropriate. If the ECB shifts its inflation target, the markets might consider that the central bank is “moving the goalposts”, which could influence the euro in future.

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