Despite the Pound Euro exchange rate slipping on the latest concerns about Britain’s economy and the Brexit process, European Central Bank (ECB) dovishness weighed on the Euro and helped GBP/EUR bounce back.
Pound (GBP) Exchange Rate Strength Limited as Brexit Concerns Worsen
The Pound was initially unable to capitalise on Euro weakness on Thursday as the day’s UK data, and uncertainties about Brexit and the Bank of England (BoE) policy outlook took a toll on Sterling.
Bets of a November Bank of England interest rate hike rose following the publication of Wednesday’s better-than-expected UK Gross Domestic Product (GDP) projections.
However, analysts remain highly uncertain that the BoE will actually hike UK interest rates next week amid Brexit uncertainty and concerns about the strength of the domestic economy.
The UK economy is still growing below trend, and the latest retail data from the Confederation of British Industry (CBI) indicated retail activity plummeted in October.
On top of this, reports have emerged that the EU may limit a post-Brexit UK-EU transitional period to just 20 months, rather than the full two years that the UK government has proposed.
Businesses are becoming increasingly anxious about the Brexit process and how it could affect UK-EU trade after 2019.
Euro (EUR) Exchange Rates Tumble as Investors Digest Dovish ECB News
Thursday’s highly anticipated European Central Bank (ECB) policy decision went largely as analysts expected, with the bank dovishly detailing its plans to rein in quantitative easing (QE).
The bank confirmed that it would cut its bond buying scheme from €60bn a month to €30bn a month from January 2018.
This is planned to continue until September 2018. The bank made sure to note that this deadline could be extended and that the level of QE could be altered if necessary.
Unsurprisingly, interest rates were left frozen at their loosest levels on record.
Though the news was largely unsurprising, it appeared to have the bank’s desired effect of making the Euro unappealing.
In a following press conference, ECB President Mario Draghi forecast that Eurozone inflation would weaken to just 1.2% in 2018, before recovering to around 1.5% again in 2019.
His expectation for weaker inflation, as well as his insistence that the QE scheme remained ‘open-ended’, kept a lot of pressure on the Euro, and helped GBP EUR advance.
Pound Euro (GBP/EUR) Exchange Rate Forecast: Bank of England Takes Focus
The European Central Bank’s (ECB) dovish decision today is likely to put a cap on Euro strength going forward, but is unlikely to drag the shared currency down much further either.
Despite the expectation that Eurozone inflation will weaken again before it strengthens, the bank appeared happy with how the Eurozone’s economic recovery was progressing.
Still, ECB President Mario Draghi did note that the bank was watching tensions between Spain and Catalonia very closely.
The Pound Euro exchange rate is unlikely to see much shift in movement during Friday trade amid a lack of highly influential data – unless there are surprising Brexit developments.
Next week though investors are likely to focus more and more on Thursday’s highly anticipated Bank of England (BoE) policy decision, the outcome of which is still full of uncertainty.
If the bank does move to hike UK interest rates, as some analysts speculate it will, GBP EUR will soar. The pair will plunge if the bank leaves policy frozen however.
Other notable data that could influence the Pound Euro exchange rate next week includes UK Markit PMIs, Eurozone growth projections and Eurozone unemployment stats.