The Euro Pound exchange rate tumbled to a three-week-low of 0.8852 on Thursday as investors digested the European Central Bank’s (ECB) cautious quantitative easing (QE) outlook. Sterling remains weighed down by Brexit and UK economic jitters however.
Despite the Pound’s weakness, EUR GBP looks to end the week below its opening level of 0.8937.
Euro (EUR) Drops as European Central Bank (ECB) Cuts but Extends QE
Thursday saw the European Central Bank (ECB) hold its highly anticipated October policy decision.
For months, analysts and traders have been speculating on how the bank would plan to unwind its aggressive quantitative easing (QE) measures.
As expected, the ECB did indeed cut its bond buying scheme; from €60bn per month to €30bn per month. The bank also confirmed that the scheme would be extended to a flexible deadline of September 2018.
In a following press conference, ECB President Mario Draghi asserted that the deadline could be extended further if necessary, which disappointed hawkish investors hoping for the program to be fully unwound over the coming year.
Draghi also clarified that the QE cut was not considered to be ‘tapering’. The overall dovish tone Draghi took was enough to cause a drop in bets that the ECB would be tightening monetary policy any time soon.
As a result, the Euro plunged. As the strength of the single currency was becoming an issue for Eurozone exporters and the ECB itself, this is likely the result that the bank was hoping for with its dovish tone.
As the bank’s quantitative easing (QE) program seems it will remain in place for some time, the Euro outlook dropped and the currency is unlikely to take a bullish turn in the short-term.
Key Eurozone data due in the coming sessions could have an impact on the shared currency though. Throughout the week, growth stats and unemployment data from throughout the Euro bloc will be published.
If Eurozone growth data beats expectations, it’s likely the shared currency will see stronger support, limiting its potential losses.
Pound (GBP) Pressured by Bank of England (BoE) Uncertainty
Market focus has turned towards the Bank of England (BoE) since the ECB meeting is now over and done with, and investors are highly anxious about whether or not the bank will hike UK interest rates as soon as next week.
There is a case for rates to rise, which is why many analysts and traders argue it will happen.
UK Gross Domestic Product (GDP) projections beat expectations in Wednesday’s growth report, indicating that Britain’s economy had been more resilient in the third quarter than expected.
Then there is the hawkish comments made by BoE policymakers in recent months, arguing that interest rates may need to be adjusted in the coming months.
However, some analysts and traders still believe November’s policy decision would be too soon for a rate hike.
Recent data has indicated that Brexit uncertainties and the UK pay squeeze are beginning to have a more pronounced effect on economic activity.
Due to this, as well as a lack of real clarity in forward guidance from BoE officials, many would argue that Britain’s economy may not be strong enough to support a higher interest rate.
Uncertainty about whether or not the BoE will tighten UK interest rates next Thursday is likely to leave the Pound volatile in the run up to the meeting.
This means Sterling may not react much to early-week UK data, such as BoE consumer credit, GfK consumer confidence or Markit’s manufacturing PMI from October.
No matter what decision the BoE makes during its Thursday policy announcement, the Pound is likely to see a strong reaction.
If the bank does indeed hike UK interest rates, Sterling is likely to surge and would easily push back a currently weakened Euro.
On the other hand, if the bank keeps rates frozen and remains vague on how soon UK interest rates could rise, the Pound would weaken and the Euro Pound exchange rate would rise again.
EUR GBP Interbank Rate
At the time of writing this article, the Euro Pound exchange rate trended in the region of 0.8868. The Pound to Euro exchange rate traded at around 1.1275.
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