Euro Hits Six-Week High Against Pound Sterling
After hinting at the need for additional stimulus over the past few weeks, the European Central Bank (ECB) has delivered softer monetary policy than traders had anticipated, cutting the deposit rate to -0.30% and extending quantitative easing. Having feared the worst, traders are now flocking back to the Euro.
Earlier…
Composite and Services PMIs Due Out Later
After the surprise deceleration in both the UK manufacturing and construction sectors, investors will be hoping for better results from today’s immanent Composite and Services PMIs. The GBP/EUR exchange rate has been able to advance today because of weak Euro appetite ahead of the European Central Bank interest rate decision.
While investors have been predicting an increase in monetary stimulus, especially following poor inflation figures, not all of the 25 European Central Bank (ECB) governors agree with President Mario Draghi. ECB executive board member Sabine Lautenschläger and Bundesbank President Jens Weidmann have previously expressed scepticism that additional stimulus is required, with the current round of quantitative easing only halfway through.
Earlier…
While last week’s PMIs showed better-than-expected growth in the Eurozone economy, today’s inflation data has piled additional pressure on the European Central Bank (ECB) to increase its efforts to stimulate the economy. Pound Sterling has only been able to extend a small lead on the common currency after being weakened by poor UK manufacturing and construction sector growth.
GBP/EUR Exchange Rate Advance Slowed as Manufacturing and Construction Sector Growth Slows
Yesterday’s Markit Manufacturing PMI showed that growth in the sector slowed more-than-predicted, with the index dropping from 55.2 to 52.7. Today’s Construction PMI shows a similar performance, with growth slowing by -3.3 points rather than the -0.3 points forecast.
Pound Sterling has also been weakened by the Bank of England (BoE), who have bolstered fears of a housing crisis by identifying the market as one of the key threats to UK financial stability. The Bank will review the regulations regarding lending for buy-to-let purposes, which it believes is less strict than mortgages for home owners. Credit loss rates for buy-to-let loans are twice the level of those on loans taken out by owner occupiers. According to the Bank’s Financial Policy Committee (FPC): ‘Buy-to-let borrowers may be more vulnerable to an unexpected rise in interest rates or a fall in income, which could exacerbate the scale of a fall in house prices.’
The GBP/EUR exchange rate is currently trending in the region of 1.4202.
EUR/GBP Exchange Rate Forecast: Poor CPI Results Confirm ECB Fears of Sluggish Inflation Growth
Eurozone inflation failed to grow in November. The Core Consumer Price Index, which disregards volatile purchases such as energy, was predicted to hold steady at 1.1% but instead showed a fall in growth to 0.9%, while the non-core CPI failed to rise to the 0.2% rate forecast.
Investors are already cautious in anticipation of increased stimulus by the European Central Bank (ECB) which could be announced following tomorrow’s meeting. The number of economists predicting additional measures has leapt up since October, with 80% believing ECB President Mario Draghi will extend quantitative easing past the original end point of September 2016, 65% expecting the monthly value of bonds purchased to rise from €60 billion and 75% believing the deposit rate will be cut further into negative territory.
Mario Draghi had previously said at the Frankfurt European Banking Congress that if the ECB ‘conclude that the balance of risks to our medium-term price stability objective is skewed to the downside, we will act by using all the instruments available within our mandate…If we decide that the current trajectory of our policy is not sufficient to achieve our objective, we will do what we must to raise inflation as quickly as possible. That is what our price stability mandate requires of us.’
The EUR/GBP exchange rate is currently trending between 0.7028 and 0.7070.
GBP/EUR Exchange Rate Forecast: Key ECB Policy Decision Tomorrow
The European Central Bank will meet tomorrow to decide upon the action required to stimulate the European economy. The Euro is likely to remain weak ahead of the decision and negative news could see the common currency plummet, although it may be saved from significant losses as the almost-certainty of additional stimulus means these measures have already been priced in to the exchange rate.
The GBP/EUR exchange rate is currently trading between 1.4136 and 1.4225.
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