Eurozone inflation splitting opinions

Yesterday saw GBP/EUR rates break through the 1.16 barrier - a 10 day high - during an unusually dovish speech from ECB president Mario Draghi. A sharp rise in Germany’s core inflation rate to 1.7% for the month of December put the ECB under significant pressure to re-evaluate the current 0% benchmark interest rate. However, whilst inflation for the Eurozone as a whole doubled to 1.1% it still remained significantly below the target rate of 2% and as a result no policy changes were made.

Mario Draghi also noted that while the Eurozone appeared to be moving away from the deflationary pressures seen in late 2016, the sharp rise in core inflation was largely due to higher oil prices following OPEC’s deal to cut supply at their meeting on the 30th November in Vienna and not due to a substantial upward trend in underlying inflation levels.

How will the EU plug the budget Gap?

The UK is the 7th largest net contributor to the EU budget. In 2015 the UK paid £13bn into the EU budget (12%) of which an estimated £4.5bn (4%) was invested back into the UK, leaving the net contribution from the UK into the EU’s budget at an estimated £8.5bn (8%).

With this in mind how could future Euro rates be affected? A think-tank set up by former European Commission president, Jacques Delors has warned EU chiefs the impact of the EU budget black hole “would likely deepen the existing cleavage between net contributors and net recipients”. Further suggesting, Angela Merkel may wish to weaken her stance on “rosinenpickerei” - cherry picking - and open up the possibility of a “pay for access” tie between the UK and single market in order to plug a portion of the deficit.

However, other EU leaders have maintained if the UK is given any leniency in negotiations it could pave the way for the rise of the populist parties in France and Netherlands, elections for which take place on March 15th and April 23rd respectively. Whilst there has been no response regarding the think-tank comments from Angela Merkel as of yet, any related news could have a significant impact on GBP/EUR rates.

Economic data releases next week

On Tuesday, next week we see the release of Markit manufacturing and services PMI data at 9:00am, capturing the business conditions in the respective sectors and the overall economic condition in the Eurozone. If the figure deviates from the consensus it could cause spikes in either direction for and give those with either a EUR purchase or selling requirement short term opportunities.

GBP/EUR could be significantly affected by Brexit negotiations, with much of the movements depending on how negotiations take form. Clients with a Euro buying or selling requirement may wish to protect their position sooner rather than later, by detailing your requirements with your dedicated broker. Call today on 01494 725 353 or email me here if youd like to learn more.

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