Current Pound to Euro Outlook - Tuesday's GBP EUR Exchange Rate Lower on Inflation data

August 18, 2014 - Written by John Cameron

STORY LINK Current Pound to Euro Outlook - Tuesday's GBP EUR Exchange Rate Lower on Inflation data

Currency News UK - The currenct British Pound to Euro Outlook - GBP EUR is Forecast To Lower - European Central Bank (ECB) Chief Mario Draghi famously stated that he would do ‘whatever it takes’ to preserve the euro (currency:EUR) shortly after he took over the top job at the euroland’s central bank.

Up to this point, this has involved the ECB trimming its key lending rate to an all-time low of 0.15%, introducing a negative overnight deposit rate for the region’s retail banks and announcing a €1bn splurge of targeted Long Term Re-financing Operations (LTRO) for later this year.

However, Draghi has so far resisted the temptation to announce a bout of all-out Quantitative Easing mirroring the asset purchase schemes actioned by the Bank of England and the US Federal Reserve during recent years. Nevertheless, data from the eurozone during recent weeks may have tipped the balance in favour of QE for mainland Europe. Last week’s announcement that the euro area’s economic powerhouse Germany had slipped back into contraction during the three months to the end of June provided a major jolt to the system of investors holding the single currency. Meanwhile statistics confirming that France had re-entered a technical recession following two consecutive quarters of non-positive growth added to the picture of an economy grinding to a halt once more. The data set which may have sealed the deal regarding QE from the ECB was the latest regional CPI inflation number which showed that the rate of price rises had slipped to a paltry 0.4% last month - far too close to the negative territory which would signal deflation for comfort.

A period of falling prices for the euroland could prove decimating for the region’s economy. Almost twenty years ago, Japan faced a similar prospect following its own painful banking sector crisis; the Bank of Japan’s procrastination in introducing its Quantitative Easing programme has since been credited with draining the nation of the economic verve and entrepreneurship which had made it the second largest economy in the world at one point. Recent confidence surveys of economic participants in the eurozone have suggested that they are beginning to feel the fear in the way their Japanese counterparts were around the turn of the century. Draghi will have taken note of these numbers and it now appears a live possibility that the European Central Bank will announce that it is set to begin directly purchasing sovereign debt before the end of this year. Such an announcement of Quantitative Easing would be certain to see investors shift out of euro-denominated assets in their droves – a move which would surely send the GBP EUR exchange rate through its extant 2-year high of 1.2897.

Meanwhile, the UK’s economic policy seems to be heading in the opposite direction. Wednesday’s Bank of England minutes are expected to show a split decision on monetary policy for the first time since Mark Carney took over at the UK lender of the last resort. The consensus amongst analysts is that one of the nine-member committee will have voted in favour of a domestic interest rate rise. However, some economists are touting a 7-2 result, with Martin Weale and Ian McCafferty the dissenters. Such an outcome would propel the Pound closer to a fresh 24-month peak against the single currency.

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