The Pound to Euro exchange rate (GBP/EUR) strengthened by around 0.4 cents yesterday as a soft German Manufacturing print and comments from European Central Bank President Mario Draghi impacted demand for the single currency.
Although the Eurozone Composite PMI hit its highest level for over 2 years, coming in at 52.1, the Euro was unable to attract investors yesterday morning because markets were preoccupied with a disappointing German Manufacturing print of 51.3, lower than forecasts of 52.2. The soft German score brought Manufacturing activity in the 17-nation bloc down to 51.1 in September, which was seen to dampen expectations for Eurozone GDP in the third quarter.
Sterling’s rise from 1.1845 to 1.1890 was completed during the afternoon as ECP President Mario Draghi said that he is prepared to unleash another quota of long-term low-interest loans to help boost liquidity and keep market interest rates down. Draghi created the Long-Term Refinancing Operation (LTRO) back in 2011 to ensure that Eurozone banks had cheap access to funds in order to spur credit growth in the currency bloc. The scheme gave banks access to over €1 trillion, which brought excess liquidity in the 17-nation bloc up to €800 billion at the start of 2012.
Speaking at the European Parliament yesterday Draghi said:
“We are ready to use any instrument, including another LTRO if needed, to maintain the short-term money market rates at a level which is warranted by our assessment of inflation in the medium-term.”
The spectre of further monetary easing, in the form of an interest rate cut or another round of LTROs, has been weighing over the single currency for a few months and yesterday’s statement suggests that investors’ anxieties were warranted.
Indeed, the Eurozone’s soft inflationary outlook – the Consumer Price Index fell from 1.6% to 1.3% last month – is likely to drive ECB policymakers towards an increasingly dovish standpoint, and this could damage demand for the Euro further as talk of ECB easing intensifies.
GBP/EUR hit an 8-month high of 1.1971 last week and it is possible that Sterling could look to challenge a new multi-month high in the near future if ECB rhetoric remains dovish and UK data remains resilient. The most significant data releases this week for the pair are likely to be this morning’s German IFO Business Climate indicator, which is expected to inch slightly higher to a fresh 17-month high of 108.0, and Thursday’s second quarter UK GDP reading, which is expected to be confirmed at 0.7%. However, neither release is predicted to yield much market movement and GBP/EUR’s fate could be decided by comments from Central Bankers in Britain and the Eurozone.
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