EUR GBP Exchange Rate Tight ahead of High-Impact BoE Inflation Report

May 10, 2017 - Written by James Fuller

STORY LINK EUR GBP Exchange Rate Tight ahead of High-Impact BoE Inflation Report

The Euro’s lacklustre performance against the Pound today follows a speech from ECB President Mario Draghi.

Although Draghi was optimistic about Eurozone growth, he stressed that ‘it is too early to declare success’.

This ‘wait and see’ attitude, along with a frosty reception from the Dutch MPs Draghi was speaking to, has lowered confidence in the Euro. Traders hoping for a more optimistic outlook on monetary policy are clearly set to wait longer, potentially until after the German election later this year.

The ECB could influence the Euro on Thursday and Friday as well, with speeches and a bulletin release planned before the end of the week.

Speeches from officials Vitor Constancio and Peter Praet are due on Thursday, while solo remarks are expected from Constancio on Friday.

Thursday’s most high-impact ECB release is likely to be the bulletin. Offering a snapshot of previous, current and future Eurozone performance, the bulletin could trigger a Euro to Pound rally. While a specific endorsement of Emmanuel Macron is out of the question, the bulletin could still raise Euro demand if it shows optimism about a more stable French economy.

Friday’s big news will be Q1 German GDP estimates. Moderate growth is forecast on the quarter and year, which may be enough to raise EUR/GBP demand.

The Pound has traded tightly against the Euro today, moving between exchange rates of 1.18-1.19.

With no domestic data to refer to, traders have instead reacted to National Institute of Economic and Social Research (NIESR) forecasts for UK inflation.

NIESR officials predict that UK inflation will rise considerably in 2017, but Theresa May’s calling of the general election will prevent it reaching a dangerous level.

The Pound was also aided by NIESR economists leaving their UK growth forecasts unchanged, at 1.7% for 2017 and 1.9% for 2018.

Thursday could be busy for Pound trading, with major trade and production stats out ahead of Bank of England (BoE) policy decisions.

The March trade balance previously showed a deficit expansion to -3.66bn; if this reduces then the Pound may appreciate.

Other early data releases will include construction output and production figures for March. Sterling may rise if construction rises by 2.8% as predicted, but could soften if industrial and manufacturing slows as forecast.

The main events will be the BoE interest rate decision, inflation report and minutes. The rate decision itself could be a non-event, as forecasts are for another rate freeze at 0.25%.

Inflation is the point to focus on, given that some economists have forecast inflation of 3.4% by the end of 2017. If the BoE report estimates inflation in this area, then the Pound could rally on higher hopes of a near-term interest rate hike.

Traders may initially hesitate on trading the Pound on such a forecast, as NIESR analysts predict frozen interest rates even up to 3.4% inflation.

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TAGS: Euro Pound Forecasts