Pound Euro Exchange Rate Forecast: GBP/EUR Fluctuates as Draghi Suggests Monetary Policy Will Remain ‘Reactive’

Update: GBP/EUR Rallies as Draghi Comments Dampen ECB Speculation

The Pound to Euro (GBP/EUR) exchange rate is holding steady this afternoon as the Euro’s earlier gains were erased by ECB President, Mario Draghi’s speech accompanying the bank’s rate decision.

The main driver behind the correction in the GBP/EUR exchange rate was Draghi’s suggestion that, in light of its downbeat inflation outlook the ECB’s approach to monetary policy would remain ‘reactive’.

This dampened hopes of a more hawkish stance from the bank in the coming months after it removed its mention of a pledge to extend its bond purchases in today’s policy statement.

ECB Removes Stipulation to Raise QE if Needed, Pressuring GBP/EUR Rate

The Pound to Euro (GBP/EUR) exchange rate was forced to retreat this afternoon as markets welcomed the European Central Bank’s (ECB) decision to drop its easing bias.

At the time of writing GBP/EUR is down 0.2%, with the pairing falling close to the three-month low struck on Wednesday.

Euro Soars as ECB Drops Pledge to Raise QE if Needed

The Euro is pushing higher against the Pound this afternoon following the ECB’s latest policy meeting.

Unsurprisingly policymakers voted to leave interest rates on hold again this month, with rates remaining at a record low of 0%.

The bank also made no mention of altering its current pace of quantitative easing which will stay at €30bn until September.

However a change in the ECB’s policy statement appeared to suggest that policymakers are becoming more hawkish in their outlook.

The change in question was regard the bank’s easing bias, as it dropped its pledge to extend its QE programme if it felt the Eurozone was underperforming.

The missing phase previously stated:

‘If the outlook becomes less favourable… the Governing Council stands ready to increase the asset purchase programme (APP) in terms of size and/or duration.’

Investors took this as an indication that the ECB is seriously considering wrapping up its stimulus programme, the first step in it normalising monetary policy and raising interest rates.

Brexit Fears Continue to Hamper the Pound Euro Exchange Rate

The Pound meanwhile is struggling to make any headway in the face of growing Brexit uncertainty, following the publication of the EU’s draft guidelines for the second stage of negotiations.

The document comes as a bit of a blow to the UK government as they appear to reject any notion that the EU will be willing to grant a ‘bespoke’ trade agreement.

The draft guidelines warn that there can be no ‘cherry-picking’ of parts of single market access.

While financial services are not mentioned specifically this will dent hopes that that they could be included in a free trade agreement.

EU Council president, Donald Tusk issued the warning following the release of the document:

‘Our agreement will not make trade between the UK and EU frictionless or smoother, it will make it more complicated and costly than today for all of us. This is the essence of Brexit.’

GBP/EUR Exchange Rate Forecast: UK Trade Figures to Lift Sterling?

Looking ahead the GBP/EUR exchange rate may attempt to rally on Friday, following the publication of the UK’s latest trade balance.

Economists forecast that the UK’s latest trade figures will show that Britain’s trade deficit narrowed from -£4.8bn to -£3.8bn in January.

Any uptick in the Pound may be further expected by the accompanying industrial production figures as analysts predict that UK factory output will have rebounded sharply at the start of the year.

Meanwhile Germany will publish its own trade figures tomorrow, with a decline in the country’s sizeable trade surplus likely to dent the Euro.

Luke Trevail

Luke studied Journalism at university but quickly moved into the financial sector, initially working in retail banking before joining TorFX in 2007. As a Senior Account Manager Luke assists in overseeing the management of the company’s exposure to currency volatility. He uses his years of foreign exchange experience to produce regular news updates exploring the latest currency movements.

Contact Luke Trevail