The Euro Pound exchange rate dipped on Wednesday as the latest comments from Bank of England (BoE) officials boosted Pound demand. However, the Pound’s strength has been limited as investors are hesitant to bet strongly on the BoE’s monetary policy stance. EUR GBP has gained from the week’s opening level of 0.8757 to over 0.88.
Euro (EUR) Supported by Political Outlook
The Eurozone’s political outlook has stabilised and improved in recent months, as France has elected a new pro-EU President in Emmanuel Macron and diplomatic ties between France and Germany look to strengthen.
Macron argued strongly during his campaign trail for a stronger, reformed and more integrated Eurozone. His strong performance in French legislative elections has strengthened his ability to work on his proposals.
This week, German Chancellor Angela Merkel notably stated that she may be willing to back Macron’s proposals for a Eurozone finance minister or Eurozone budget under the right circumstances.
This is just the latest example of what has appeared to be a strong start to Macron and Merkel’s relationship. The possibility of a stronger, reformed Eurozone has improved the Euro outlook.
However, while the Euro has held its ground over the last week it has lacked the drive to push much higher.
Preliminary June PMIs for the Eurozone, from Markit, will be published on Friday. These will be the first major indication of how the Eurozone economy has performed this month and if they impress the Euro outlook will improve.
Pound (GBP) Mixed on BoE Split
This week’s EUR GBP gains have been largely due to Pound weakness.
The Pound plunged earlier in the week as Bank of England (BoE) Governor Mark Carney stated that Britain was not yet ready for an interest rate hike. This disappointed investors after a 5-3 split to leave rates frozen during last week’s BoE policy decision.
Carney’s comments were quickly contrasted on Wednesday, when the bank’s chief economist, Andy Haldane, unexpectedly took up a highly hawkish tone.
Haldane shocked investors by arguing that the bank could hike UK interest rates much sooner than markets expect, possibly even by the end of the year. He stated;
‘Provided the data are still on track, I do think that beginning the process of withdrawing some of the incremental stimulus provided last August would be prudent moving into the second half of the year.’
As a result, some analysts have suggested there is a 50/50 chance of the BoE winding down some of its most aggressive stimulus measures and tightening UK rates by the end of the year.
However, Sterling’s gains on Haldane’s comments were limited. Investors have been concerned that Britain’s economic data could worsen in the coming months which would turn Haldane dovish again.
Others have simply speculated that there won’t be enough hawkish BoE members to vote for higher rates. One of the bank’s most hawkish policymakers, Kristin Forbes, is stepping down at the end of June and her replacement is unlikely to be as hawkish.
This leaves just three hawkish policymakers compared to five more dovish ones.
The Pound’s long-term outlook will be affected by political developments as investors remain concerned about the lasting power of the new minority Conservative government.
Of course, investors will be keeping an eye on economic data over the coming months too as worse-than-expected ecostats would likely turn Haldane dovish again and weaken the Pound outlook.
EUR GBP Interbank Rate
At the time of writing this article, the Euro Pound exchange rate trended in the region of 0.8815. The Pound to Euro exchange rate traded at around 1.1345.
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