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GBP EUR Exchange Rate Advances as Investors Anticipate European Central Bank (ECB) Meeting

January 22, 2018 - Written by Minesh Chaudhari

Despite news that Germany’s SPD Party had voted to move forward in vital coalition talks with German Chancellor Angela Merkel’s CDU Party, the British Pound to Euro exchange rate continued to strengthen on Monday with Euro investors anxious ahead of this week’s upcoming European Central Bank (ECB) policy decision.

Poor UK ecostats failed to put much pressure on GBP/EUR last week and the pair ultimately advanced from 1.1249 to 1.1335. The GBP/EUR exchange rate’s upside trend continued on Monday as the pair tested a high of 1.1399 – its best level in over a month.

GBP Boosted by Hopes of Economic Strength despite Brexit Process

Britain’s economy may be weathering the threat of the Brexit process itself better than analysts predicted.

On top of hawkish comments made by Bank of England (BoE) policymaker Michael Saunders last week, the Pound was supported on Monday by a surprisingly optimistic UK economic outlook from Lord Jim O’Neill.

O’Neill, a former Conservative Treasury minister and known ‘Remain’ supporter, stated that due to the improving global growth outlook, Britain’s economy could see strong growth in 2018 despite the potential effects of Brexit.

On Monday, he O’Neill stated;

‘I certainly wouldn't have thought the UK economy would be as robust as it currently seems,

That is because some parts of the country, led by the North West [of England], and are actually doing way better than people seem to realise or appreciate.

As well as this crucial fact, the rest of the world is also doing way better than many people would have thought a year ago, so it makes it easier for the UK.’

Essentially, the rising global growth outlook has made it more likely that Britain will see strong growth, though O’Neill pointed out domestic growth may have been even stronger if not for the Brexit process.

EUR Strength Limited Ahead of European Central Bank Policy Meeting

Since last week, market demand for the Euro has been weaker due to uncertainty about the tone the European Central Bank (ECB) will take in the coming months.

Investors were briefly even more bullish on the Euro following the publication of the ECB’s December meeting minutes, in which the bank hinted that the language used in its forward guidance may need to evolve sometime in early 2018.

However, officials from the bank expressed concern with the Euro’s rally following the report, which indicated to markets that the bank may not be preparing to change its stance on monetary policy sooner than previously expected after all.

Analysts are now hesitant to buy the Euro ahead of Thursday’s upcoming January policy decision from the bank, amid hopes that the bank will give more hints about its 2018 policy outlook.

Monday’s Eurozone ecostats had no notable effect on Euro trade and the currency’s strength was also weighed by German political uncertainties.

While Germany’s SPD Party did vote to hold coalition talks with German Chancellor Angela Merkel’s CDU Party, the vote was closer than expected and this indicated to markets that Merkel’s popularity was fading. This weighed on the Euro’s appeal too.

GBP/EUR Forecast: UK Wage Data in Focus Until Thursday

As the European Central Bank (ECB) policy decision will be held on Thursday, the Euro is likely to see limited movement until then. As a result, the Pound to Euro exchange rate is more likely to be driven by UK data and Pound movement.

Tuesday will see the publication of Britain’s December public sector net borrowing report, but Pound investors will be more focused on Wednesday’s session when Britain’s November job market report will be published.

The unemployment rate could influence Sterling if it surprises but the biggest focus will be on the latest UK wage growth report.

If UK wages come in higher than expected, it will boost hopes that wages are catching up with domestic inflation.

This would not only cause speculation that the household pay squeeze could come to an end soon, but also potentially put more pressure on the Bank of England (BoE) to take a more hawkish stance on monetary policy over the coming year.

ZEW’s Eurozone economic sentiment data on Tuesday and Markit’s Eurozone PMIs on Wednesday could influence GBP/EUR slightly, but UK wage data and the European Central Bank’s upcoming meeting will be this week’s biggest Pound and Euro influences.
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