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Signs of ECB Dovishness Limit Pound Euro Exchange Rate Downside

Euro Currency Forecast

Speculation over the outlook of the European Central Bank (ECB) helped to shore up the Pound Euro exchange rate at the start of the week, with markets still debating the prospect of any imminent policy moves.

Comments from ECB Executive Board member Benoît Cœuré did not offer anything in the way of encouragement to the Euro on Monday morning.

As Cœuré indicated that monetary policy is still likely to remain accommodative for longer this undermined market hopes that the central bank could be shifting towards a more hawkish outlook.

Altogether the chances of the ECB beginning to taper its quantitative easing program imminently look rather slimmer than investors would like, limiting the appeal of the single currency.

As analysts at Bank of America Merrill Lynch noted:

‘The strength of the Euro this year makes us even more confident that the ECB will take all the time it has with QE. It is inevitable in our view that the ECB will have to revise its inflation projection downwards again in September, further away from its target, to a large extent because of the strong Euro.

‘Moreover, we would expect strong forward guidance that policy rate hikes above zero will be on the table only after inflation is close enough to the target.’

Even so, the GBP EUR exchange rate may struggle to hold onto its gains for long if the latest Eurozone data continues to paint a relatively positive picture of the currency union’s economic health.

A solid uptick in July’s industrial production data could offer the Euro a rallying point, with stronger domestic signals likely to give policymakers greater cause for hawkishness.

However, if commentary from ECB officials continues to point towards a more dovish policy outlook this could significantly limit any Euro bullishness.

Rising UK Inflation May Boost Pound Confidence

Brexit-based worries continued to weigh on the Pound, meanwhile, as parliament prepared to vote on the critical repeal bill.

With Labour intending to oppose the bill, which could grant the government undue influence over the incorporation of existing EU laws into UK law, the division over Brexit shows no signs of easing.

If markets continue to see reason to fear an exit via the cliff-edge this is likely to weigh heavily on the Pound for the foreseeable future.

Even so, August’s UK consumer price index report could offer GBP exchange rates a rallying point.

Any signs that inflation is still pushing higher may encourage the Bank of England (BoE) to consider returning to a tightening bias.

Even though rising inflationary pressure would also have a negative impact on consumer confidence and spending investors remain primarily focused on the outlook of the BoE, limiting the negative impact of an uptick.

On the other hand, if inflation fails to strength as forecast this could encourage the GBP EUR exchange rate to trend lower as the chances of any imminent interest rate hike fade.