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Pound Euro (GBP EUR) Slips on Fresh BoE Rate Hike Caution

October 27, 2017 - Written by John Cameron

The Pound Euro exchange rate dwindled this morning on fresh uncertainty regarding the potential outcome of the Bank of England’s (BoE) November rate meeting.

GBP Exchange Rates Encumbered by Pessimistic Outlook for UK Economy



Markets might be pricing in a rate hike from the BoE on November the 2nd, but investors remain concerned about monetary policy prospects beyond November, with the UK’s economic outlook continuing to prove pessimistic.

Data on Friday morning from Halifax demonstrated that public confidence in the future for UK house prices has now dropped to its lowest level in five years, according to a survey.

Halifax’s October house price optimism reading fell to 30 points, down from the previous period’s 44 points and marking the poorest reading since December of 2012.

This effectively raises another potential concern for the BoE as it considers monetary policy in the coming months.

Adam Cole, Currency Strategist at RBC Capital Markets shared this sentiment in a note to clients:

‘The main question for GBP is what happens to expectations for rates beyond November. Our economists have just reiterated their view… that November’s hike will be the only move in 2017/2018’.

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Whether this will occur or not will be highly dependent on the performance of UK data, however, with Brexit negotiation progress (or a lack thereof) in the coming months also liable to affect future plans for business investment in the UK.

This news weighed on the GBP EUR exchange rate this morning, despite yesterday’s cautious move from the European Central Bank (ECB).

EUR Exchange Rates Remains Steady despite Cautious ECB



The Euro has stabilised this morning after yesterday’s dovish move from the ECB, with markets growing bearish before the release of the US GDP figures.

The ECB acted contrary to the expectation of monetary hawks yesterday by announcing that it has extended its economic stimulus programme (QE) until September 2018.

The ECB did, however, announce that its stimulus bond purchases will be halved from €60bn to €30bn per month, with ECB Governor Mario Draghi asserting that QE measures were definitely ‘not going to stop suddenly’, despite calls from some of his governing council who wanted a swift departure from the programme.

Economist at ING-DiBA Carsetn Brzeski stated that this ‘very gentle’ modus demonstrates that the ECB wants to navigate the exit as delicately as possible – without seeing the single currency climb.

Indeed, the Euro remaining high continues to be a point of contention for the ECB, who remain concerned that it is preventing inflation in the bloc from reaching target levels.

In some senses yesterday’s cautious move from the ECB could indicate what Brzeski is suggesting; that the ECB is intentionally going about this process as dovishly as possible to keep the value of the Euro down and (hopefully) foster inflation.

Nonetheless, the Euro remains relatively stable, despite suggestions that the ECB could be moving to keep interest rates at record lows until 2019 – presenting a significant distinction between the ECB, the BoE and notably the US Fed.

GBP EUR Forecast: Volatility Forecast on Imminent US GDP



The Pound Euro exchange rate could become increasingly volatile on today’s US GDP release, especially if it falls as forecast.

After demonstrating its quickest pace of growth since 2015 in Q2, US GDP is now expected to have slowed in Q3, with markets forecasting that the advanced estimate will print at an annualised rate of 2.5% from July to September.

Exactly what we can expect from this print will likely be dependent on the factors like the contribution from consumer spending – something that accounts for a significant chunk of GDP – as well as the damage caused by Hurricanes Irma and Harvey.

Whilst demand was high in September to replace cars that had been destroyed in the recent storms, discretionary spending on things like going out to eat and recreational activities are likely to have dragged – with September’s jobs reported demonstrating a significant fall in food services and drinking hubs.

Strategists at TD Securities share this concern, stating:

‘The storms’ negative impact is likely to be concentrated in non-residential structures and homebuilding, while we see a risk for weaker consumer spending as services could take a hit’.

If US GDP does indeed disappoint then the Euro will be deemed the more attractive currency, thus applying significant pressure to GBP EUR. If, however, US GDP beats expectations, then the Euro could falter.

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