Euro hovers near three-month highs against British Pound despite weak German data

EUR/GBP steadies above 0.8600 after hitting a fresh three-week high of 0.8610.
Markets have shrugged off the downbeat German GfK Consumer Confidence data.
A more hawkish BoE has failed to support the Pound.

Guillermo Alcala FXStreet

The Euro (EUR) remains practically flat, just below three-month highs against the British Pound (GBP) on Friday, despite the downbeat German consumer confidence data released earlier in the day. The EUR/GBP pair stands above 0.8600 after hitting a fresh high of 0.8610, on track to close the week up 0.37%.

Data released by the Nuremberg Institute for Market Decisions and the GfK market research institute earlier on Friday revealed that consumers’ confidence for October fell to -30.6, its worst reading in the last five months, from –26.6 the previous month, exceeding market expectations of a more moderate deterioration to -27.4.

The GfK report highlights that rising energy prices are eating up households’ disposable income, a feeling that is expected to extend into the coming months, as the income expectations sub-index fell to -15.0 from 1.7 in September. In this context, consumers' willingness to save has increased to 21.5 from 15.5 in the previous month, with a corresponding decline in their purchasing plans.

A more hawkish BoE fails to support the Pound

The Pound has been on its back foot this week since UK Public Sector Net Borrowing data overshot estimates, reviving concerns about fiscal stability. On Thursday, the UK Bank of England's (BoE) Deputy Governor Clare Lombardelli affirmed that the bank will have to raise interest rates if energy prices stay elevated, although the positive impact on the Pound was negligible.

Strategists at Brown Brothers Harriman highlight a growing disconnect between market expectations and their own view of the Bank of England’s policy path. “The swaps curve continues to imply about 100bps of BoE rate hikes in the next twelve months to 4.75%,” say their BBH experts, who also affirm that “the BoE may not need to tighten as much as markets expect.”

In their assessment, “the UK economy is already operating below capacity, the Bank Rate at 3.75% is near the top of the BoE’s estimated 2% to 4% neutral range, and fiscal policy will likely turn more restrictive,” all of which suggest a more limited scope for further tightening than is currently priced.

Economic Indicator

GfK Consumer Confidence Survey

The GfK Consumer Confidence is a leading index that measures the level of consumer confidence in economic activity. A high level of consumer confidence stimulates economic expansion while a low level drives to economic downturn. Generally speaking, a high reading is positive (or bullish) for the EUR, while a low reading is seen as negative (or bearish).

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