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EUR to GBP Exchange Rate Sheds Ground as ECB Officials Express Currency Strength Concern

January 17, 2018 - Written by

As more European Central Bank (ECB) officials express concern about the persistent bullishness of the Euro, the Euro to British Pound exchange rate has been unable to hold its ground. Eurozone inflation has also failed to impress Euro investors.

Following last week’s modest gains from 0.8865 to 0.8889, EUR/GBP has trended within a mostly tight region for most of this week so far – until Wednesday when the pair tumbled to around 0.8860. The pair remained above last week’s low of 0.8810 however.

EUR Demand Fades as European Central Bank Officials Show Concern on Currency’s Strength

Last week’s European Central Bank (ECB) meeting minutes report from December led to a boost in demand for the recently strong Euro.

The minutes report indicated that the bank was preparing to alter the language used for forward guidance sometime in the coming months, which led to speculation that the bank could be taking a more hawkish tone on monetary policy sooner than previously expected.

However, since then some high ranking European Central Bank officials have expressed concerns about the strength of the Euro, leading some analysts to be concerned that the bank may hesitate to take a more hawkish tone after all.

ECB policymaker Ewald Nowotny stated on Wednesday that the Euro’s recent gains in strength, especially against the US Dollar (USD), were ‘not helpful’.

These comments from officials reflected the concerns of some analysts. According to Adam Cole, chief FX strategist at RBC Capital Markets;

‘The Euro’s strength will cause some concerns to the ECB and it will definitely complicate their policymaking thinking, and some investors are taking profits after the recent rally,’

As it was weakened by cautious comments from European Central Bank officials, the Euro saw no support from the Eurozone’s final December Consumer Price Index (CPI) results – which largely met expectations anyway.

Year on year inflation slipped from 1.5% to 1.4% as expected, while the yearly core inflation rate remained at the projected 0.9%. The monthly inflation rate improved from 0.1% to 0.4% as forecast.

Overall, the inflation report did little to detract from the European Central Bank’s view that Eurozone inflation would slow in 2018, so this put additional pressure on market hopes for ECB hawkishness.

GBP Benefits from Seemingly Amicable Comments from EU Officials

Despite Tuesday’s underwhelming UK inflation report, the Pound was able to advance against the Euro on Wednesday due to Euro weakness and hopes that 2018 Brexit negotiations would go smoothly.

Pound volatility has fallen in recent weeks, indicating that markets don’t currently expect the Pound to see any significant shifts in movement.

This also means that markets are generally confident that UK-EU Brexit negotiations will not collapse, meaning a ‘no deal’ Brexit is largely seen as unlikely.

On top of this, the British currency has been supported by friendly comments from EU chief executive Jean-Claude Juncker on Wednesday.

Juncker once again expressed regret that the UK had voted Brexit and indicated that if Britain wanted to, it could activate ‘Article 49’ following Brexit which would allow the nation to return to membership.

While the UK government has shown no indication of having second thoughts on Brexit, the Pound benefitted from hopes that EU officials would take more amenable tones during the second phase of Brexit talks.

EUR/GBP Forecast: UK Retail Sales Results Ahead

The Euro to Pound exchange rate is likely to be driven by Sterling strength in the coming days and investors are likely to remain hesitant to buy the Euro as next week’s European Central Bank (ECB) policy decision approaches.

Friday will see the publication of Britain’s December retail sales report, which could boost Sterling demand if it indicates that UK consumer activity was stronger last month than expected.

If UK retail stats impress, EUR/GBP could fall further towards the end of the week.

Thursday’s trade data from The Netherland’s and Friday’s from Spain are unlikely to be particularly influential.

Euro investors are likely to pay closer attention to any fresh comments from ECB officials, or simply await next week’s news.

Eurozone economic and consumer confidence data will be published on Tuesday, followed by January PMI projections on Wednesday and of course the European Central Bank’s highly anticipated January monetary policy decision on Thursday.

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