Confidence Comments From ECB President Fail to Shore up Euro (EUR) Exchange Rates
UPDATE: Comments from European Central Bank (ECB) President Mario Draghi failed to give the Euro (EUR) much of a boost today.
Although Draghi expressed confidence in the continued expansion of the Eurozone economy investors proved reluctant to buy back into the single currency.
In spite of this the central bank is expected to maintain a more cautious approach to monetary policy in the months ahead with an interest rate hike still a distant prospect.
As a result, the Pound Sterling to Euro (GBP/EUR) exchange rate remained trapped in a narrow range ahead of the weekend.
Pound Sterling Euro (GBP/EUR) Exchange Rate Muted after Eurozone Industrial Production Rebounds
A surprisingly strong rebound in Eurozone industrial production in August offered support to the Euro (EUR) this morning, encouraging greater optimism in the economic outlook.
As production surged 1.0% on the month, reversing July’s -0.7% contraction, this helped to alleviate some of the pressure on the single currency.
Confirmation that the German consumer price index picked up from 2.0% to 2.3% on the year in September also gave EUR exchange rates fresh cause for confidence.
However, the Euro struggled to make significant headway against its rivals thanks to lingering market worries over the Italian budget dispute.
With Italian policymakers continuing to push back against EU budget rules the threat of further political turmoil kept EUR exchange rates on a weaker footing ahead of the weekend.
Doubts Mount Over Odds of Imminent Brexit Deal
Increasing doubts over the likelihood of the UK and EU reaching an agreement over Brexit on Monday limited the appeal of Pound Sterling (GBP), meanwhile.
As GBP exchange rates had benefitted from earlier market optimism about the prospect of an imminent deal this left the Pound biased to the downside.
With the minority government partner, the Democratic Unionist Party (DUP), threatening to undermine Theresa May’s minority government, and cabinet rumblings over the continued membership of the customs union the odds of a successful deal have diminished.
As tensions rise ahead of next week’s critical EU summit the Pound is likely to come under increased pressure, with timing fast running out for the two sides to agree a deal ahead of the March 2019 deadline.
In the absence of concrete Brexit progress the Pound Sterling to Euro (GBP/EUR) exchange rate looks set to soften once again.
Italian Budget Worries Remain Significant Drag on Euro (EUR)
Until the issue of the Italian budget is resolved support for the Euro could prove limited, though, with investors still wary of the potential for a fresh Eurozone debt crisis.
While the threat of an Italian exit from the currency union appears minimal at best the ill will between government officials and the European Commission does not bode well for EUR exchange rates.
Any escalation in the political row may see the single currency slump sharply, especially if rating agencies follow through with downgrades to the Italian outlook.
Tuesday’s German ZEW economic sentiment survey is not expected to boost the appeal of the Euro as markets anticipate another contraction in business confidence.
Rising UK Inflation to Shore up Pound as Pressure on BoE Increases
While Brexit developments are likely to dominate the mood of the GBP/EUR exchange rate next week the latest UK wage and inflation data could still offer a rallying point.
Forecasts point towards an acceleration in September’s annual inflation rate from 2.7% to 2.8%, pushing further away from the Bank of England’s (BoE) 2% target.
This would give the BoE greater incentive to consider raising interest rates again in the months ahead, to the benefit of the Pound.
However, if UK wage growth shows signs of faltering the Pound Sterling to Euro (GBP/EUR) exchange rate could experience fresh bearishness.