- GBP Climbs – ECB ‘Brexit’ warning boosts ‘remain’ campaign
- EUR Struggles – Dovish Draghi speech weighs
- GBP/EUR Forecast to Hold Gains – UK services data to provoke volatility
Pound Sterling (GBP) Exchange Rates Volatile on ‘Brexit’ Uncertainty
The British Pound opened Thursday’s European session in a weak position having declined during the previous two days trade. Renewed anxiety regarding the potential for the UK to vote to leave the European Union was the main cause for Sterling weakness. The latest opinion polls have produced far tighter results, quelling initial optimism that the ‘remain’ campaign would run away with the vote.
British economic data has left a lot to be desired in recent days, with weak sectoral output predicted to drag on economic growth. Today’s data showed that construction output came in below expectations in May, adding to already tepid manufacturing output in the same month.
Commenting on the construction report, David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement & Supply, said:
‘The sector appeared to have taken residence in a waiting room of non-activity, as continuing poor global economic conditions and uncertainty around the EU referendum impacted growth and new orders. Supplier performance degraded and continued its downwards trend which began in September 2010. Purchasing activity ground to a virtual standstill.’
However, this weak data failed to impact on Sterling which has steadily advanced as the session progressed. The appreciation is mostly the result of traders taking advantage of Sterling’s comparatively weak trade weighting, although yet another warning from a high ranking global official with regards to the dangers of a ‘Brexit’ also fuelled gains.
European Central Bank (ECB) President Mario Draghi stated;
‘Of course… the UK and Europe and the Eurozone are mutually beneficial. The ECB has a view that the UK should remain in the European Union, because the European Union would benefit from its presence. And we believe the UK would benefit from being in the European Union too.’
This is thought to be persuasive for those unsure about how to vote on June 23rd to back remaining a member of the EU.
Euro (EUR) Exchange Rates Cool after Draghi Signals More Stimulus Ahead
As was expected by most analysts the ECB avoided making any changes to monetary policy today. This was mostly because policymakers are unlikely to make any significant changes until there is more clarity with regards to Federal Reserve rate hikes, and ahead of the EU referendum results.
In the following press conference, however, President Draghi continues to parrot previous assertions that the central bank will do everything it takes to bring inflation back to target.
‘He chose a dovish tilt,’ stated Oppenheimer Portfolio Manager Alessio de Longis. ‘He struck a very fine balance but to me the balance is slightly more dovish than I expected.’
Draghi also stressed that stimulus measures have only so much scope for affecting changes, and individual governments need to step up operations to support the ECB’s extensive monetary stimulus program.
‘As emphasized repeatedly by the Governing Council, and as strongly echoed in both European and international policy discussions, in order to reap the full benefits from our monetary policy measures, other policy areas must contribute much more decisively, both at the national and at the European levels,’ Draghi said. ‘It is crucial to ensure that the very low inflation environment doesn’t become entrenched.’
GBP/EUR Exchange Rate Forecast to Hold Gains ahead of UK Services Data
The Pound Sterling to Euro (GBP/EUR) exchange rate is likely to maintain gains for the remainder of Thursday’s trade given the absence of further domestic data to affect changes.
There will be a number of ecostats due for publication on Friday with potential to cause GBP/EUR volatility, although political developments regarding the EU referendum will still likely be the principle driver of movement.
Traders will pay particular attention to the UK’s Services PMI as the sector accounts for the largest portion of British Gross Domestic Product. Poor services output will compound fears of a significant British economic slowdown.
European ecostats are unlikely to be as impactful, but US labour market data is very likely to cause market movement. Disappointing results from US Unemployment Rate and Change in Non-Farm Payrolls could boost the Euro thanks to negative correlation.
During Thursday’s European session, the Pound Sterling to Euro (GBP/EUR) exchange rate was trending within the range of 1.2850 to 1.2953.
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