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Could Dovish ECB Taper Announcement Reverse Euro Pound Exchange Rate Uptrend?

European Central Bank

An unexpected uptick in the Eurozone M3 for September encouraged the Euro to strengthen ahead of the latest European Central Bank (ECB) policy decision.

While the modest increase in the domestic money supply suggests some increase in inflationary pressure this is unlikely to impact upon today’s meeting.

Even so, this offered encouragement to investors who are still hoping to see a slightly more confident announcement from the ECB as it begins to taper its quantitative easing program.

However, if ECB President Mario Draghi adopts a more dovish tone this could return the Euro Pound exchange rate to a weaker footing.

As expectations for some form of tapering are already priced into the single currency the potential for further gains is likely to remain limited, barring a decidedly hawkish policy outlook.

Volatility is also likely for EUR exchange rates as the Catalan regional administration prepares to respond to the Spanish government’s invocation of article 155.

There is still a distinct risk that President Carles Puigdemont may opt to make a unilateral declaration of independence, raising the risk of the crisis continuing to escalate.

If there are any signs of violence this could weigh heavily on the Euro, potentially bringing the future stability of the Eurozone back into question.

Pound Gains Ease in Spite of High BoE Rate Hike Odds

Although the third quarter UK gross domestic product report bettered expectations this ultimately failed to keep the Pound on bullish form for long.

As researchers at Rabobank noted:

‘Even at 0.4%, the growth pace is still below-trend and much weaker than in other developed economies. The better-than-expected release did however remove the last barrier for the Bank of England to pursue their planned but not uncontroversial rate hike.’

This suggests that the underlying strength of the UK economy remains limited, especially as consumer spending looks set to weaken further as the wage squeeze worsens.

As a result growth may struggle to hold this pace in the fourth quarter, leaving the Pound open to renewed downside pressure in the coming months.

The EUR GBP exchange rate could find further support if the latest CBI retailing reported sales index slumps from 42 to 14 in line with forecasts.

While even a weaker showing here is unlikely to significantly alter the odds of an imminent Bank of England (BoE) interest rate hike this could still dent the Pound.

Any further signs that point towards weakness within the UK economy are likely to keep the Pound generally biased to the downside, especially as Brexit-based uncertainty persists.

Current EUR GBP Interbank Exchange Rates

At the time of writing, the Euro Pound exchange rate was making solid gains in the region of 0.8937. Meanwhile, the Pound Euro exchange rate was slumped around 1.1185.