This week’s comments from officials at the Bank of England (BoE) and European Central Bank (ECB) have caused confusion among Pound Euro traders, but by Thursday the pair was trending flatly again.
After hitting a 2017 low of 1.1261 on Wednesday morning, GBP EUR trended flatly near the week’s opening levels of 1.1360 today.
Pound (GBP) Strengthens Following Hawkish BoE Comments
Sterling was easily pushed lower by a strong Euro earlier in the week amid a lack of strong domestic ecostats as well as lingering economic and political uncertainty.
However, in the middle of the week Bank of England (BoE) Governor Mark Carney surprised investors by indicating that it may be necessary to withdraw the bank’s aggressive stimulus policies in the foreseeable future.
This was the first notable indication from the BoE boss that policy could tighten in a long time. As a result, the Pound outlook improved and the currency soared.
However, Carney was careful to note that this potential tightening relied on strong economic activity in Britain, particularly in regards to wage growth and the Brexit process.
While Brexit negotiations appeared to be off to a fairly amicable start, the UK government has been criticised for failing to provide enough post-Brexit guarantees for EU nationals living in Britain.
If Brexit negotiations fail to impress, the BoE may hesitate to tighten monetary policy any time soon. This, of course, would disappoint markets and weaken the Pound outlook.
UK ecostats will be a big focus for Pound investors now too. If data continues to indicate that Britain’s economy is resilient despite the Brexit process, or if wage growth improves, BoE interest rate hikes will rise and the Pound outlook will strengthen. On the other hand, worsening UK data would lead to further Pound weakness.
The Pound has been unable to gain against a sturdy Euro this week.
Euro (EUR) Drops as Markets Misread ECB President
Earlier in the week, European Central Bank (ECB) President Mario Draghi indicated that the bank should be prudent in how it proceeded with potentially unwinding its aggressive quantitative easing (QE) package.
Markets reacted with surprise and bought into the Euro amid speculation that the bank may be preparing to tighten monetary policy sooner than expected, potentially even by the end of the year.
However, on Wednesday ECB sources told Reuters that markets may have misinterpreted Draghi’s intentions.
Draghi had reportedly intended to prepare markets for the possibility of policy adjustment later this year at the earliest, rather than hinting at any commitment to tighter policy.
As a result of the report, the Euro fell from its best levels. However, the ECB remains optimistic about inflation gradually recovering, leaving Euro traders optimistic about the possibility of QE being lightened by the end of the year.
This week’s Eurozone inflation stats could influence ECB tightening bets. Italy and Spain’s preliminary June inflation results came in slightly below expectations, slipping to 1.2% and 1.5% year-on-year respectively.
Germany’s inflation stats due on Thursday afternoon and the Eurozone’s due on Friday will also be focuses for Euro traders. If they disappoint, ECB bets could drop and the GBP EUR outlook would improve.
GBP EUR Interbank Rate
At the time of writing this article, the Pound Euro exchange rate trended in the region of 1.1378. The Euro to Pound exchange rate traded at around 0.8790.
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