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European Central Bank (ECB) Uncertainty Leaves Euro Pound Outlook Murky

Euro Currency Forecast

As Brexit jitters took hold of Pound investors, the Euro Pound exchange rate edged higher towards the end of Monday’s European session. EUR GBP was trending in the region of 0.8782 at the time of writing.

Monday saw the publication of the Eurozone’s final June inflation report, which met market expectations in every print.

Monthly inflation came in at 0% with year-on-year inflation slipping to 1.3%. However, core inflation advanced from 0.9% to 1.1%, which the European Central Bank (ECB) will be happy with.

Even if Tuesday’s Eurozone or UK data surprises traders, investors may want to hold off this week’s biggest Pound movements until this week’s round of Brexit negotiations take place.

[Published 10:30 BST 17/07/2017]

The Euro Pound exchange rate briefly touched on a 2017 high of 0.8940 last week, before tumbling towards the end of the week. Investors took profit from the Euro’s highs and the shared currency failed to hold its ground due to uncertainty over the European Central Bank (ECB) outlook.

EUR GBP dropped to its lowest levels in almost a month, 0.8747.

Euro (EUR) Fails to Hold Ground on Mixed ECB Speculation

Over the past week, there has been an increasingly mixed narrative surrounding the European Central Bank (ECB) and its monetary policy outlook.

Some reports have claimed the ECB could announce its planned date for withdrawing the quantitative easing (QE) scheme as soon as September.

However, other reports have indicated that the ECB is still hesitant to plan an end-date for QE and would rather leave it open-ended.

Euro investors have been waiting for signals that QE withdrawal is on the horizon before continuing to buy the shared currency, which has been strong over the last few months.

The shared currency has been supported by decent ecostats too, but due to uncertainty about the ECB outlook these have not helped the Euro to rise above psychological resistance.

Until the ECB begins to show more clarity on its position regarding the future of QE, the Euro’s long-term outlook is foggy.

If this week’s Eurozone inflation stats are strong, it could boost hopes that the ECB will take a more hawkish tone soon.

This week will also see the European Central Bank hold its July monetary policy decision. The bank is not expected to many any policy changes, but any signals of a shifting tone could definitely impact currency trade.

Investors will buy into the Euro if the bank hints that it could discuss QE in the coming months, but if the bank becomes more dovish again the Euro Pound exchange rate will plummet this week.

Pound (GBP) Edges Higher on Persistent Bank of England (BoE) Speculation

Sterling briefly tumbled at the beginning of last week, but after touching on a 2017 low against the Euro the British currency put in a solid recovery.

Investors don’t necessarily expect the Bank of England (BoE) to tighten UK monetary policy any time soon. However, some BoE officials such as the hawkish Ian McCafferty have argued that tighter policy should at least be discussed in policy meetings.

This led to stronger Pound demand which is supporting the British currency so far this week.

Investors will be waiting for key UK ecostats, as well as any further statements from BoE officials, before making the next big moves on the Pound.

Tuesday will see the publication of June’s UK Consumer Price Index (CPI) results, which are forecast to hold at 2.9% year-on-year but slip to 0.2% month-on-month.

If inflation is higher than expected, BoE tightening speculation will flare up again and the Pound will strengthen. Weaker inflation may not hurt the Pound much either as it could relieve concerns about the UK pay squeeze.

Speaking of the pay squeeze, Thursday will see the publication of June’s UK retail sales results. If retail sales underperform, analysts will become even more concerned that the pay squeeze is having a negative effect on Britain’s economy.

This would weaken the long-term Pound outlook as investors lose hope that Britain’s economy could remain resilient for the remainder of the year.

EUR GBP Interbank Rate

At the time of writing this article, the Euro Pound exchange rate trended in the region of 0.8756. The Pound to Euro exchange rate traded at around 1.1420.