Euro Pound Exchange Rate Regains Ground as Doubts Grow Over Imminent BoE Rate Hike

Modified: Thursday, 5 October 2017 15:35 BST - Written by Ben Hughes

STORY LINK Euro Pound Exchange Rate Regains Ground as Doubts Grow Over Imminent BoE Rate Hike

As markets reacted poorly to Theresa May’s fraught Conservative Party conference speech the Euro Pound exchange rate made solid gains.

Although ministers have been quick to rally around May in the wake of the less-than-triumphant speech the Pound remains under pressure from a sense of political jitters, particularly as Brexit-based uncertainty is still clouding the domestic outlook.

On the other hand, the Euro has also come under some pressure in the wake of the controversial Catalan independence referendum.

Tensions between the autonomous region and the Spanish government have continued to mount, with regional leader Carles Puigdemont having suggested that a unilateral declaration of independence could come in a matter of days.

This has reignited some of the concern over the future stability of the Eurozone as a whole, limiting the appeal of the single currency as the situation looks not to be moving closer towards any peaceful resolution.

Doubts Grow Over Odds of Imminent BoE Interest Rate Hike

Political concerns are likely to mute demand for the Pound in the coming days, even though various government officials have been quick to squash suggestions that Theresa May could be going anywhere.

As Viraj Patel, research analyst at ING, commented:

‘For GBP markets, two channels of political uncertainty have arisen from the Tory Party conference: (1) more confusion over the government’s Brexit transition deal strategy – with reports that some senior ministers want it to last for more than two years versus Boris Johnson’s stringent ‘red lines’; and (2) ongoing questions over PM May’s leadership – where we note that odds of the Prime Minister leaving by year-end have risen in betting market (to around 30%). While neither are likely to actively weigh on GBP, we are wary that it may limit the effects of any BoE policy-driven upside in the near-term.’

Unless investors see signs of any positive progress with regards to Brexit negotiations then Sterling may struggle to find any particular traction against its rivals.

Doubts over the likelihood of any imminent Bank of England (BoE) interest rate hike have also been mounting, meanwhile.

With high odds of a 2017 rate hike already priced into the Pound the growing sense of uncertainty amongst investors has left GBP exchange rates largely biased to the downside.

However, hawkish commentary from BoE policymakers could still help to bolster the appeal of the Pound ahead of the weekend.

Continued signs of hawkishness from chief economist Andy Haldane could offer particular support to Sterling, given that Haldane was once known as the most dovish member of the Monetary Policy Committee (MPC).

If Haldane adopts a more muted stance on monetary policy, though, this may offer the EUR GBP exchange rate a fresh rallying point.

ECB Minutes Offer Limited Euro Support

The nature of the latest European Central Bank (ECB) meeting minutes was not overly hawkish, with policymakers still expressing doubt over the strength of underlying inflationary pressures.

This suggests that the central bank is still in no hurry to begin tightening monetary policy, although this was not enough to reverse the EUR GBP exchange rate’s gains.

As strategists at TD Securities noted:

‘The macro picture remains little changed, as the ECB has to balance solid growth with continuously disappointing inflation. So far there hasn't been much concern about the stronger EUR's impact on growth, although the EUR's impact on inflation is a source of debate at the ECB. Most ECB members seem to be of the view though that the positive impact from stronger demand will outweigh the drag on inflation from EUR appreciation.’

Forecasts point towards a modest rebound in German factory orders on the month in August, which could bolster the appeal of the single currency on Friday.

Any indications that the Eurozone’s powerhouse economy remains in a fairly robust state of health are likely to encourage investors to favour the Euro, in the short term at least.

However, the strength of EUR exchange rates is likely to remain relatively limited as markets await the next developments regarding Catalonia.

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TAGS: Euro Pound Forecasts