The Pound to Euro exchange rate (GBP/EUR) appreciated by around half a cent yesterday to reach a fresh 2.5-month high of 1.2240 in reaction to European Central Bank President Mario Draghi’s latest bout of dovish sentiment.
GBP to Euro barely moved an inch in response to the Bank of England rate decision, which saw the UK central bank maintain its benchmark interest rate of 0.50% and refrain from making any modification to its quantitative easing programme. The announcement failed to move markets because it had been widely anticipated beforehand.
The Pound fell to its lowest level in a week against the single currency when the ECB announced its policy decision for May. The European Central Bank elected to maintain its benchmark rate of 0.25% and made no changes to its 0.00% deposit rate.
However, demand for the Euro began to deteriorate during Draghi’s press conference. The ECB Chief has been sounding increasingly dovish with each passing policy statement, to the point that analysts see nothing but a loosening of monetary policy at the next meeting.
Draghi told reporters that the governing council was “dissatisfied about the projected path of inflation…not resigned to have too low inflation for too long a time”. With Eurozone CPI currently running at 0.7% – about a third of the bank’s 2.0% target – it seems that the ECB is finally willing to try and drive price pressures higher next time out.
The ECB President went as far to say that the governing council was “comfortable with acting next time”. He also intimated that there was a possibility of a “broad-based asset purchasing programme”.
The strong suggestion that June’s meeting will bring a fresh set of stimulus measures from the ECB weighed on the Euro and sent GBP/EUR to a fresh 2.5-month high. Sterling was only 17 pips shy of a 15-month high.
If the central bank really does loosen monetary policy next month then it is entirely likely that the Pound to Euro exchange rate will drive through resistance at 1.2257 and register a new yearly high.
However, it is possible that GBP/EUR could reach 1.2257 before the ECB statement in June if British data continues to impress.
Earlier this week the dominant UK service sector posted a 5-month high score of 58.7 and if this morning’s British industrial output figure prints positively then it is likely to bolster demand for the Pound. The monthly gauge of industrial activity is predicted to come in at -0.2% meaning that anything above stagnation would probably be considered bullish for Sterling.
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