After months of anticipation, the European Central Bank (ECB) is expected to detail its plans for unwinding quantitative easing (QE) during next week’s policy decision and the details could have a direct impact on the strength of the Euro Pound exchange rate.
EUR GBP trended at around 0.8898 when markets opened on Monday and has recovered most of last week’s losses. The pair hit a high of 0.9020 on Friday morning before slipping to 0.89 again.
Euro (EUR) Investors Anticipate European Central Bank (ECB) Decision
Demand for the Euro slipped slightly on Friday morning as investors adjusted their positions on the shared currency ahead of a potentially influential week.
Traders are anxious about political uncertainties in Spain, as well as what tone the European Central Bank (ECB) will take with its upcoming policy decision.
On Friday, the Spanish government confirmed that it was lowering its 2018 growth outlook from 2.6% to 2.3% – largely due to uncertainties about Catalonia.
News that Spain is likely to move towards direct rule over the autonomous nation on Saturday has made markets more confident that Catalonia won’t break away from Spain any time soon.
However, it remains a possibility that high tensions between Spain and Catalonia could impact Spain’s economic strength, which has dampened the Euro outlook slightly.
While the weekend’s news could influence the Euro outlook, investors will be increasingly focused on the European Central Bank (ECB) in the coming sessions.
The ECB will hold its October policy meeting and the decision will be announced on Thursday.
Analysts widely expect the ECB will detail its plans for unwinding its aggressive quantitative easing (QE) scheme and the ECB itself has indicated as much too.
However, reports have recently emerged that the ECB will leave some QE on hold for an extended period of time due to subdued Eurozone inflation and the recent strength of the Euro currency.
This has weighed on Euro strength, as hawkish traders had been hoping for a more hawkish tone from the bank.
If the bank does indeed make its QE withdrawal plans sound cautious and dovish, the Euro Pound exchange rate is likely to weaken in response. On the other hand, a surprisingly hawkish tone from the bank would lead to a surge in Euro demand.
Either way, with the Eurozone outlook still gradually improving, the Euro outlook is unlikely to worsen considerably even if the ECB and upcoming data disappoints.
Pound (GBP) Boosted from Lows on Brexit Hopes
After tumbling for most of the week, the Pound saw stronger demand on Friday as it was supported by a decent UK public borrowing report as well as fresh hopes of progress in Brexit negotiations.
Britain’s September public sector net borrowing results only worsened to £-5.33b despite being forecast to come in at £-5.7b. The previous figure was revised higher too, from £-5.09b to £-4.14b.
The UK Treasury was pleased with the result, which showed the lowest September borrowing deficit since 2007.
On top of this, investors were also pleased by news that EU leaders were officially beginning preparation for the second phase of UK-EU Brexit negotiations.
Brexit talks have been stuck at a ‘deadlock’ over the past month and markets were becoming increasingly anxious that talks could fall through and lead to a ‘no deal’ Brexit.
However, while talks remain stuck for now, the latest developments showed that there was still hope for progress to be made.
According to Terry Scuoler, chief executive of manufacturer trade body EEF;
‘The warmer words emerging from the European Council following the approach adopted by the Prime Minister suggest there is a glimmer of light at the end of this tunnel.
Business needs to see more than a hint of progress, however, because serious planning for transitional arrangements should be taking place now if companies are to firm up their business plans and pin down investment.’
The increasingly conciliatory tones of both UK and EU negotiators have boosted market hopes that Brexit negotiations could still improve.
As a result, Brexit is likely to remain the focus of Pound traders for the time being.
Still, next week’s UK growth projections could prove influential, especially if they are perceived as having a possible impact on the Bank of England (BoE) policy decision coming during the first week of November.
EUR GBP Interbank Rate
At the time of writing this article, the Euro Pound exchange rate trended in the region of 0.8960. The Pound to Euro exchange rate traded at around 1.1160.
Comments are closed.