January 11, 2018 - Written by Tim Boyer
STORY LINK GBP to EUR Exchange Rate Falls to Weekly Low as European Central Bank (ECB) Minutes Surprise
Thursday’s European Central Bank (ECB) meeting minutes surprised British Pound to Euro exchange rate traders with its hints that the bank’s tone could be becoming more hawkish in the coming months. The Pound remained limp following Wednesday’s mixed UK ecostats.
After opening this week at the level of 1.1278, the GBP/EUR exchange rate tested highs near 1.1350. However, the pair has since fallen from those highs and on Thursday afternoon GBP/EUR was trending in the region of 1.1240.
GBP Investors Await UK Inflation Stats Following Week of Mixed Data
The latest UK data has done little to change the Pound outlook, as investors remain anxious about the upcoming second phase of Brexit negotiations and persistent uncertainties about the Brexit process itself remain a major downside to Pound trade.
Wednesday saw the publication of Britain’s November industrial and manufacturing results, which beat expectations in every major print and indicated that the factory sector had done more for Britain’s economy in the last quarter of 2017 than expected.
On top of this, NIESR’s Q4 UK Gross Domestic Product (GDP) estimate came in at 0.6%, higher than the analyst consensus of 0.5%.
Despite these optimistic figures, November’s UK trade deficit report widened to £-2.804b while the previous figure was revised lower from £-1.405b to £-2.270b.
Investors were also concerned by an analysis commissioned by the Mayor of London, Sadiq Khan. The report claimed that a potential ‘no deal’ Brexit could leave Britain with half a million less jobs than it currently has.
Khan noted that the report illustrated how different Brexit outcome scenarios could affect the country. He stated that in a worst-case ‘no deal’ scenario;
‘London does least worst, because we have a higher concentration of high value jobs, we are more resilient, more able to recover from economic shock, which could lead to the inequalities between London and the country getting worse … Whatever scenario we look at when it comes to leaving the EU, the inequalities between London and the south-east and the country widen, not narrow.’
EUR Supported by Surprisingly Hawkish European Central Bank (ECB)
The European Central Bank (ECB) published its December meeting minutes on Thursday. While analysts expected the report to be generally unsurprising, the language used in the report hinted that the bank might be changing its tone in the coming months.
Towards the end of 2017, the ECB lightened its aggressive quantitative easing (QE) package and now analysts are speculating that the ECB could be on track to lighten it further much sooner than previously expected.
According to Connor Campbell from SpreadEx;
‘The Euro rocketed higher this Thursday afternoon following a slightly more hawkish than expected set of ECB meeting minutes.
While the end of QE isn’t here just yet, there were a few notable shifts in the phrasing of the central bank’s December accounts that suggest talk of winding down its massive bond buying programme is likely going to become more and more prevalent as 2018 continues. Of course the Euro – which at the moment doesn’t need much excuse to celebrate – was incredibly receptive to these signals.’
This boosted Euro demand. The shared currency was also supported by solid Eurozone ecostats from recent sessions, as well as signs that German Chancellor Angela Merkel’s CDU Party could be edging closer to formal coalition negotiations with the SPD Party.
GBP/EUR Forecast: Key Inflation Stats Due for Publication Next Week
The Pound to Euro exchange rate could end the week below its opening levels due to a lack of notable data due for publication on Friday.
French and Spanish inflation results are unlikely to be hugely influential as Euro investors will be awaiting next week’s data before making more big moves on the shared currency.
As for the Pound, no notable UK data will be published until next week’s UK Consumer Price Index (CPI) report from December.
UK inflation is forecast to have slowed from 3.1% to 3% year-on-year in December. If the data comes in higher than expected next Tuesday it could boost market speculation that the Bank of England (BoE)
could be pressured into hiking UK interest rates at some point over the next year.
Lower than expected UK inflation data would make it even easier for the Euro to push GBP/EUR lower in the coming week however.
On the other hand, if next Wednesday’s Eurozone inflation report falls short of projections it could cause concern that the European Central Bank (ECB)
may not take a more hawkish stance any time soon after all. This could help GBP/EUR to recover recent losses.
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TAGS: Pound Euro Forecasts