Comments from ECB’s Lagarde Weigh on Euro Appeal
UPDATE: Reaction to the European Central Bank (ECB) policy announcement saw the Euro (EUR) falling further out of favour this afternoon.
As ECB President Christine Lagarde indicated a preference for higher growth and higher rates this limited the appeal of the Euro, even though this seemed to reflect lower odds of any future monetary loosening.
Pound Euro (GBP/EUR) Exchange Rate Eases as Hard Brexit Anxiety Persists
The Pound Sterling to Euro (GBP/EUR) exchange rate failed to hold onto its bullish momentum this morning as the impact of the strong first quarter CBI business optimism index faded.
While businesses showed a solid increase in confidence at the start of the year a growing sense of anxiety over Brexit saw Pound Sterling (GBP) weaken.
With Chancellor Sajid Javid stoking fears of a potential hard Brexit scenario the appeal of the Pound naturally diminished as confidence in the economic outlook softened.
As long as doubts over the shape of the UK’s future relationship with the EU persist GBP exchange rates are unlikely to find much support in the near term.
Signs of ECB Optimism May Encourage Euro Recovery
Demand for the Euro (EUR), meanwhile, could pick up in the wake of the European Central Bank’s (ECB) policy announcement.
If policymakers demonstrate a greater sense of optimism in the outlook of the Eurozone economy this could offer EUR exchange rates a leg up, even though no change in monetary policy looks likely.
However, a more dovish message from the central bank could see the single currency fall sharply out of favour this afternoon.
As analysts at Danske Bank noted:
‘On the economic side we expect the ECB to confirm its easing bias and acknowledge its downside risk assessment, but also note the fading downside risks.’
Any indication that the ECB could loosen monetary policy further in the coming year would leave the Euro vulnerable to selling pressure, particularly if fears of an extended Eurozone slowdown pick up.
GBP Exchange Rates Vulnerable Ahead of Latest UK Services PMI
The GBP/EUR exchange rate may shed further ground ahead of the weekend, even so, as markets brace for the latest UK manufacturing and services PMIs.
Forecasts point towards another monthly contraction for the UK manufacturing sector, highlighting the lingering impact of Brexit-based uncertainty.
Even if the manufacturing PMI slips deeper into negative growth territory, though, the Pound could still find support on the back of January’s services PMI.
After the stagnation seen in December investors hope to see a rebound in service sector activity, an improvement which could encourage bets of a stronger first quarter gross domestic product.
On the other hand, a disappointing reading from the service sector could weigh heavily on GBP exchange rates.
Fresh German Manufacturing Contraction Forecast to Weigh on Euro
January’s German manufacturing PMI could put renewed pressure on the Euro, meanwhile, as the sector looks set to remain in a state of contraction.
After hitting its lowest level since 2009 in December the PMI is expected to show a modest improvement on the month, climbing from 43.7 to 44.5.
Even so, as long as the German manufacturing sector remains in a state of sluggishness the risk of another quarter of economic slowdown could weigh on EUR exchange rates.
Unless manufacturing growth stages a strong comeback in the first month of 2020 the Euro could struggle to find any traction against its rivals.