Update: GBP/EUR Exchange Rate Remains Weak after Surprise GDP Downgrade despite Caution from European Central Bank
The minutes from the European Central Bank’s (ECB) January monetary policy meeting have disappointed markets, yet the GBP/EUR exchange rate continues to record losses today.
Policymakers have refused to change the language of their policy communications, despite there having been some chatter in recent weeks that the Governing Council may soon alter its rhetoric in an attempt to softly prepare markets for eventual tightening of monetary policy.
This suggests that the forecasts for Eurozone interest rates remain soft, although this hasn’t prevented the GBP/EUR exchange rate from staying below opening levels.
Surprise Downwards Revision to UK 2017 Fourth-Quarter GDP Pushes GBP/EUR Exchange Rate Lower
The second estimate of UK 2017 fourth-quarter growth from the Office for National Statistics has surprised forecasts today with an unexpected downgrade, which has pushed the GBP/EUR exchange rate down from its opening levels.
Data also showed that business investment was worse than initially predicted, with quarter-on-quarter figures revised from 0.5% to show no growth at all, and year-on-year investment growth raised from 1.7% to 2.1% instead of meeting forecasts for an expansion of 2.4%.
The figures have dampened the outlook for the UK economy and raised questions over whether now is the right time for the Bank of England (BoE) to consider further tightening of its monetary policy.
Pantheon Macroeconomics Chief UK Economist Samuel Tombs believes the data is a sign that the Monetary Policy Committee (MPC) should delay any plans to hike interest rates, tweeting:
‘Downward revision to Q4 #GDP puts the U.K. back at the bottom of the G7 growth leaderboard for 2017. This is not an economy that obviously needs to be cooled with higher interest rates.’
GBP/EUR Exchange Rate Weakens as ECB Prepares to Publish January Meeting Accounts, despite Declining Ifo Sentiment Indices
The approach of minutes from the European Central Bank (ECB) monetary policy meeting held between the 24th and 25th of January may be keeping the Euro on soft form elsewhere, but the GBP/EUR exchange rate has been unable to advance thanks to the UK GDP figures.
Even worse-than-expected sentiment figures from Ifo have been insufficient to push the Euro into negative territory against Pound Sterling.
The German business climate index for February dropped from 117.6 to 115.4, defying forecasts of a slip to 117 points, while the expectations index fell from a downwardly-revised 108.3 to 105.4, against predictions of a dip to 107.9.
The current assessment index weakened from an upwardly revised 127.8 to 126.3; economists had expected a reading of 127.
Ifo Institute President Clemens Fuest stated:
‘Germany’s very favourable business climate cooled down considerably this month. The Ifo Business Climate Index fell to 115.4 points in February from 117.6 points in January. Companies were less satisfied with their current business situation, but the indicator was at its second highest level since 1991.’
‘This signals economic growth of 0.7 percent in the first quarter. After the euphoria of recent months, companies’ assessments of the business outlook for the months ahead were also far less optimistic.’
GBP/EUR Exchange Rate Forecast to Decline Further if ECB Minutes Reveal Discussion of Quantitative Easing Deadline
There is no UK data left for release today, leaving the GBP/EUR exchange rate to drift lower after the gloomy growth figures released this morning by the Office for National Statistics.
The Eurozone data calendar, on the other hand, contains the hugely-impactful minutes from the European Central Bank’s first policy meeting of 2018.
Interest rate hikes are still a long way away, so markets are likely to focus more on the issue of quantitative easing: a programme that the ECB claims will have to end before borrowing costs can be raised.
There has been some discussion between members of the Governing Council regarding the need to fix an end date in place for the enormous asset purchase programme, with some policymakers believing the ECB needs to control market volatility by doing everything it can to minimise fears QE will be extended again.
Therefore if today’s minutes reveal that the ECB is moving closer to declaring that quantitative easing will end once and for all in September, as currently planned, the Euro could make strong gains as the door would then be opened to interest rate hikes.