GBP/EUR Slips Lower as Haldane Rally Cools

June 22, 2017 - Written by Toni Johnson

STORY LINK GBP/EUR Slips Lower as Haldane Rally Cools

Demand for the British Pound generated yesterday by improving UK interest rate hike odds has dissipated today.

The GBP/EUR exchange rate is stuck marginally below opening levels at 1.1339 today, as markets await the latest industry data from the Confederation of British Industry (CBI).

GBP Weakens as Haldane Rally Runs out of Steam

The Pound shot higher yesterday after Bank of England (BoE) Chief Economist Andy Haldane surprised by hinting that interest rates may be hiked before the year is through.

BoE Governor Mark Carney had said just the day prior that it is not currently the right time for hiking interest rates, especially with the Brexit talks only just beginning and any indications over the final deal still many months away.

Haldane is considered to be one of the most dovish members of the Monetary Policy Committee (MPC), so the fact he broke ranks and contradicted Carney to say that monetary tightening might soon be necessary was a total curveball.

‘Having weighed the evidence, I think that the balance of risks associated with tightening 'too early', on the one hand, and 'too late', on the other, has swung materially towards the latter in the past six to nine months,’ Haldane said, speaking in Braford.

He pointed to stronger signs of global economic growth and the fact that market fears of deflation had eased, stating;

‘A partial withdrawal of the additional policy insurance the MPC put in place last year would be prudent relatively soon, provided the data come in broadly as expected in the period ahead. Certainly, I think such a tightening is likely to be needed well ahead of current market expectations.’

EUR Unmoved as ECB Bulletin Upholds Call for Substantial Monetary Accommodation

The latest Economic Bulletin from the European Central Bank (ECB) remains broadly in line with the bank’s recent publications, giving investors little incentive to become more bullish on the Euro.

Markets have already reacted positively to the dropping of references to lower interest rates in the communications immediately after the latest monetary policy meeting, so the fact the Governing Council sees risks to price stability as unlikely is old news.

The Governing Council does expected that the Eurozone economy continues to tick over at a strong pace and is ‘projected to expand at a somewhat faster pace than previously expected’.

However, the bulletin also notes;

‘At the same time, the economic expansion has yet to translate into stronger inflation dynamics. So far, measures of underlying inflation continue to remain subdued and have yet to show a convincing upward trend. Therefore, the very substantial degree of monetary accommodation remains appropriate.’

GBP/EUR Forecast; Will CBI Data Weaken GBP Further?

Data from the Confederation of British Industry (CBI) is set for release soon and will show how manufacturing is holding up.

The trends total orders balance for June is expected to have weakened from 9 in May to 7, suggesting that demand is falling and weaker Sterling has not been sufficient to keep overseas interest high.

Meanwhile, the selling prices index is expected to fall from 23 to 20, which may come as a relief considering how strong inflation is already; further signs of price growth would have weighed on the already sour outlook for consumer spending and therefore economic growth.

After the non-event of the ECB economic bulletin, markets will be hoping for something a bit more substantial from the Eurozone consumer confidence index for June.

Forecasts expected sentiment will have crept higher, although at -3 the index will continue to show that pessimists outnumber optimists, even as the economy strengthens.

There is no further UK or Eurozone data set for release today. The Bank of England’s Kristin Forbes will give a speech in London this evening, but as she is due to leave the MPC at the end of this month, it is highly unlikely her words will count for anything, should she raise the issue of monetary policy.

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TAGS: Pound Euro Forecasts