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EUR/GBP Forecast: Euro in the Crosshairs, Can the ECB Deliver on Stimulus?

ECB President Mario Draghi

EUR/GBP Exchange Rate Muted ahead of ECB Rate Decision

The Euro Pound (EUR/GBP) exchange rate remains rangebound this morning as markets brace for what could be an explosive policy decision by the European Central Bank (ECB) this afternoon.

At the time of writing EUR/GBP exchange rate is almost unchanged from this morning’s opening levels, leaving the pairing trading at around £0.8947.

Can the ECB Live Up to Market Expectations?

All eyes are on the European Central Bank today as it prepares to deliver what could be its most important policy decision in years.

Growth in the Eurozone has slowed significantly in recent months, with the bloc’s manufacturing sector deep in contraction and Germany teetering on the edge of a recession.

As a result economists are expecting the ECB will looking to ease its monetary policy to spur growth, with the announcement of what has been billed as a ‘substantial’ stimulus package.

Expectations are high, but the question on everybody’s lips is what might the package include and if it be enough to lift the Eurozone out of the doldrums, with the risk of the Euro (EUR) falling if the measures disappoint.

In a note to clients Commerzbank warned:

‘There is high uncertainty about the extent of the expansionary measures the ECB will implement today; and therefore there is large potential for strong fluctuations in the euro exchange rates.’

This comes amid signs that some members of the ECB’s governing council are resistant to the idea of reopening the ECB’s quantitative easing programme, having weaned the Eurozone economy off of bond purchases less than a year ago.

At a minimum the ECB is forecast to lower the deposit rate to -0.5%, and will likely signal in its forward guidance that rates will remain low for longer.

On the potential resumption of QE analysts speculate the ECB could target net purchases of €30bn a month starting in October.

Also in focus will be the ECB’s latest economic forecasts, with the bank widely expected to revise its growth and inflation forecasts even lower in response to the economic headwinds which have battered the bloc in recent months.