The Euro Pound exchange rate continued to test its best levels in two weeks on Tuesday afternoon, as investors were excited about hawkish comments from European Central Bank (ECB) President Mario Draghi.
However, Draghi’s comments will only improve the long-term Euro outlook if this week’s Eurozone inflation stats do not disappoint.
Wednesday will see the publication of Italy’s preliminary June inflation data, followed by Spain and Germany on Thursday, and lastly the overall Eurozone on Friday.
If these inflation reports disappoint, it could increase market concerns that the Eurozone remains under threat from deflation despite Draghi’s confidence this week.
In this scenario, the Euro Pound exchange rate would shed most of its weekly gains.
[Previously updated 13:00 BST 27/06/2017]
After mixed movement at the beginning of the week, the Euro Pound exchange rate surged on Tuesday. The Euro outlook saw a notable improvement following the morning’s comments from European Central Bank (ECB) President Mario Draghi.
Draghi stated that while inflation remained subdued, deflationary forces are being replaced with reflationary forces. He also indicated that the bank would have to be ‘prudent’ with how it adjusted monetary policy – indicating the bank was talking about adjusting its aggressive stimulus program.
This boosted market hopes that the ECB could be tightening its stimulus measures slightly, sooner than previously expected. As a result, EUR GBP jumped to above 0.88 once again.
[Previously updated 16:53 BST 16/07/2017]
The Euro Pound exchange rate recovered from its morning dip on Monday afternoon. As Ifo’s German business confidence reports were impressive and the Pound’s political-related gains were limited, EUR GBP neared the key level of 0.88 once again.
Tuesday’s session could be relatively quiet for the Euro Pound exchange rate and may simply see the pair reacting to any potential political developments in Britain.
However, European Central Bank (ECB) President Mario Draghi will be holding a speech in the morning. If he says anything that surprises investors involving Eurozone monetary policy, the Euro is certain to react.
[Published 09:51 BST 26/06/2017]
Optimistic Eurozone data as well as widespread political and economic uncertainty in Britain has kept the Euro Pound exchange rate relatively close to multi-month-highs in recent weeks. However, concerns are growing about the Eurozone’s inflation outlook, which could weaken the shared currency.
Last week saw EUR GBP climb from 0.8757 to 0.8802. This week the pair has dipped back to 0.87.
Euro (EUR) Outlook Weakens as Inflation Expected to Slow
While the Euro has largely seen strong performance in recent weeks, the market’s Euro bullish trend may be headed to an end as analysts predict inflation in the Eurozone is due to slow further.
The European Central Bank’s (ECB) goal is to have the Eurozone’s Consumer Price Index (CPI) rise to around 2% on the year, but the most recent inflation report saw price growth slowing further than expected.
This was because global energy prices have struggled to stay buoyant. Oil prices, for example, have weakened in recent months.
As Eurozone inflation has slowed with slowing energy prices, this has indicated to the ECB and traders that much of the Eurozone’s inflation is due to global prices rather than the Eurozone’s core inflation.
This has kept the ECB cautious not to be too optimistic about inflation, as the rate of consumer price growth is still subdued.
Analysts expect Eurozone inflation will have slowed to around 1.3% in June due to this slump in energy prices – with core inflation at just 1%.
This would be the lowest inflation stat in six months and would mean the ECB is not feeling much pressure at all to tighten its aggressive monetary policy stimulus measures.
While the Eurozone’s political and economic situation is becoming overall more optimistic and the Euro’s long-term outlook is higher, its gains will be limited by slow inflation.
If the bloc’s consumer prices continue to slow more than expected in this week’s data as well as future data, the Euro outlook will worsen.
Pound (GBP) Edges Higher as Investors Hope for Steadier Political Outlook
As Britain’s economic calendar has been quiet over the last week, Pound investors have largely been reacting to the latest UK political developments.
Market uncertainty surged earlier in June when it was confirmed that the UK 2017 general election had ended in a hung parliament, meaning no party had gained enough seats to form a majority government.
Investors perceived that a weaker minority or coalition government would have a harder time pushing through economic legislation or, more vitally, undergoing smooth Brexit negotiations. This weakened the Pound outlook.
Since the election, the Conservative party, now running a minority government, has been attempting to make a deal with Northern Ireland’s Democratic Unionist Party (DUP).
Uncertainty has persisted and on occasion the deal looked to break down, but on Monday morning DUP leader Arlene Foster stated that the party was ‘close’ to making a deal to support the minority Conservative government.
This supported the Pound. If the Conservatives and the DUP to come to a deal, the Pound outlook will increase as uncertainty lightens.
Brexit negotiations also formally began last week and have gone smoothly. UK Prime Minister Theresa May has indicated she plans to go into more detail on her plans to secure the rights of EU nationals living in Britain.
If Brexit negotiations continue to go smoothly, the Pound outlook will rise further.
EUR GBP Interbank Rate
At the time of writing this article, the Euro Pound exchange rate trended in the region of 0.8790. The Pound to Euro exchange rate traded at around 1.1375.
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