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Can ECB Resist Temptation to Restore QE? EUR GBP Long-Term Forecast Hinges on Monetary Policy

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The European Central Bank (ECB) may have only just cut the rate of asset purchases under its quantitative easing programme, but with poor inflation data having swiftly followed, could the Governing Council end up quickly restoring QE to its former strength?

Meanwhile, the Bank of England (BoE) is set to announce its latest monetary policy decisions tomorrow. Markets are widely expecting the Monetary Policy Committee (MPC) to have voted in favour of an interest rate hike, but how will the long-term interest rate outlook for the UK change?

The EUR GBP exchange rate is currently -0.2% weaker in the region of 0.8748.

Will EUR Suffer as Data Makes Case for Reinstating Full QE?

The latest Eurozone and German consumer price indices were not what the European Central Bank would have wanted to see just after halving the amount of assets for purchase each month under quantitative easing.

Monday’s German CPI revealed that price growth had stagnated on the month in October, against forecasts of a hold at 0.1%, while year-on-year growth slowed from 1.8% to 1.6% instead of 1.7%.

Yesterday’s Eurozone figures showed a year-on-year weakening from 1.5% to 1.4%, while core CPI dropped from 1.1% to 0.9%.

While these figures predate the ECB’s decision to cut monthly asset purchases to €30 billion, they still unsettled markets, as the Governing Council was clear that it could always extend or expand the programme again if economic conditions warranted such a move.

Therefore it seems the next move for the ECB is not necessarily a move to unwind QE further or tighten interest rates.

GBP Long-term Outlook less Positive: Bank of England to Give with One Hand and Take with the Other?

The Bank of England’s (BoE) Monetary Policy Committee (MPC) will announce the decisions from its latest meeting tomorrow.

Markets are widely expecting that policymakers will vote to raise interest rates from their historic 323-year low of 0.25% back to the pre-referendum 0.5% – which itself was the lowest in the Bank’s history prior to the most recent cut.

Recent economic data has disappointed and weakened the likelihood of the BoE opting to hike rates again during the course of 2018.

However, the chances of the MPC backing away from a hike in tomorrow’s policy meeting haven’t been damaged, as the general consensus is that the BoE cannot afford to leave rates on hold after signalling a hike.

As Peter Dixon, Commerzbank Economist told Bloomberg TV;

‘Having taken us down this path before and disappointed us, I don’t think the bank can afford to not deliver this time. The hit to sterling would be quite significant.’

Can EUR GBP Exchange Rate Resist Depreciation Now ECB Has Delivered What Markets Wanted?

With the Euro’s main near-term source of support – the ECB meeting – having passed, the common currency faces considerable downside pressure in the coming days and weeks.

The Bank of England’s monetary policy meeting could support the Pound higher if interest rates are hiked. If subsequent PMI data this week follows the example of today’s manufacturing index, which has unexpectedly risen, EUR GBP could be under even more pressure.

Tonight’s US monetary policy announcements may also weigh on the Euro; the Federal Open Market Committee (FOMC) is expected to telegraph a December rate hike.

However, on a technical basis, the EUR GBP exchange rate is sending out strong signals of undervaluation. The relative strength indicators are currently trading around 33 points; well below the 50 level that indicates the pairing is at fair value.

Meanwhile, movement in the last few days has seen the pairing break out of the bottom of the exchange rate’s Bollinger Bands (a pair of plotted line above and below the average movement that shows the trading range of the currency). This indicates that the EUR GBP exchange rate is being oversold, so traders may be tempted to buy into the common currency.