ECB Stimulus Decision to Dictate Sterling to Euro Exchange Rate (GBP/EUR)
The Pound to Euro exchange rate (GBP/EUR) strengthened by around a third of a cent yesterday to settle just above the 1.2300 mark.
Demand for Sterling was stoked by news that job creation is currently improving at its joint-fastest pace for 17-years within Britain’s dominant service sector. The service sector PMI – which measures output across firms accounting for around 75% of the British economy – printed at 58.6 for May, confounding expectations of 58.2. The sanguine report was considered especially bullish for the Pound because it showed that employees are finally beginning to see wages increase in tandem with growing business confidence.
It is estimated that the domestic economy will post another 0.8% quarterly expansion in Q2 so long as the private sector continues to improve at the current rate through June.
Demand for the single currency was hurt by news that Eurozone producer prices shrunk by -1.2% in April and that the region only grew by 0.2% in the first three months of the year.
Furthermore, the Euro was impacted by fresh data showing that the bloc’s second largest economy is not in good health. France, recently dubbed the ‘sick man of Europe’ posted a negative service sector PMI score of 49.1 (anything below 50.0 signals contraction). Markit’s composite of total French private sector output also printed negatively, at 49.3.
Rate decisions
The future direction of the Sterling to Euro exchange rate (GBP/EUR) is likely to be dictated by events later today.
The Bank of England is widely expected to remain on the sidelines, with the 0.50% benchmark interest rate likely to be held for the 63rd consecutive month.
The European Central Bank, on the other hand, is forecast to unleash a string of new stimulus measures to help wake the Eurozone from its deflationary slumber.
Investors envisage a reduction in the benchmark interest rate from 0.25% to 0.10% (or 0.15%) and a cut in the deposit rate from 0.00% to -0.10% (or -0.15%). It is possible that GBP/EUR will remain flat, or possibly even decline, in reaction to a decision of this nature. This is because markets have largely priced the rate cuts into the Euro exchange rate already.
However, if the ECB acts more decisively with a series of rate reductions and some other form of non-standard monetary policy then it is possible that Sterling could rally back towards 1.5-year highs at 1.2373.
A decision to start purchasing Eurozone sovereign bonds would likely weaken the single currency, as would the intention to stop sterilising bonds purchased under the Securities Market Programme (SMP). Either of these two outcomes, if accompanied by cuts to the benchmark and deposit rates, would leave the Euro susceptible to sliding towards its lowest level since late-2012 against the Pound.
Comments are closed.