Euro Pound Sterling (EUR/GBP) Exchange Rate Slips as Italy Challenges EU Budget Rules

June 19, 2019 - Written by John Cameron

STORY LINK Euro Pound Sterling (EUR/GBP) Exchange Rate Slips as Italy Challenges EU Budget Rules

Euro Pound (EUR/GBP) Exchange Rate Falls as EU and Italy Clash

The Euro Pound Sterling (EUR/GBP) exchange rate edged lower and the pairing is currently trading at an inter-bank rate of £0.8892.

On Wednesday reports suggested that the Italian government will try to change the European Union’s fiscal rules.

Italy will try to allow more room for investments by reducing the role of ‘structural’ budget deficits.

The resolution was tabled by the League and 5-Star Movement in the Chamber of Deputies ahead of this week’s EU summit.

The resolution calls on the government to seek ‘the exclusion of productive investments, including those in human capital’ from deficit calculations, and ‘the revision of reference to the structural balance.’

The increased tensions between the EU and Italy likely dampened sentiment in the single currency, causing the pairing to slide.

Sterling (GBP) Rises as Inflation Hits BoE’s Target

On Wednesday morning, data showed that the UK Consumer Price Index rose by an annualised rate of 2% in May.

Inflation falling back to its target likely reassured the Bank of England (BoE) that there is no urgency to raise interest rates.

Added to this, Chief Economist at KPMG UK, Yael Selfin said markets should not ‘expect cuts any time soon,’ and added:

‘Despite the moderating pace of inflation, thanks partly to a late Easter, the Bank of England is unlikely to follow the change of heart of other major central banks. The [Monetary Policy Committee] is expected to keep its sights on the next, albeit delayed, interest rate rise, rather than contemplate an easing at this stage.

‘Assuming no major Brexit-related disruptions or other external shocks, we expect CPI inflation to remain slightly below the MPC target of 2% over the medium term, leaving scope for the MPC to keep rates unchanged until late next year.’

However, further data revealed that UK manufacturing output slowed in the second quarter thanks to Brexit uncertainties.

This was the slowest growth since April 2016, however this did little to stop Sterling rise against the Euro.

Dovish Draghi Leaves Door Open to an ECB Interest Rate Cut

On Tuesday, the single currency was left dampened after dovish comments from the President of the European Central Bank (ECB), Mario Draghi.

Draghi noted that additional stimulus would be needed ‘in the absence of any improvement’, and specifically cited an interest rate cut as an option.

According to three ECB officials, policymakers are anticipating using an interest rate cut as their first move if they need to boost inflation once again.

Commenting on this, Chief Eurozone Economist at Pantheon Macroeconomics, Claus Vistesen said:

‘Draghi is going to finish his tenure with a cut. The door is now open and I don’t see how they can not walk through it.’

Euro Pound Outlook: Dovish BoE to Weigh on GBP

Looking ahead to Thursday, the Pound (GBP) could fall against the Euro (EUR) following the release of the UK retail sales.

If sales slump further than forecast in May, it could dampen sentiment in Sterling.

Meanwhile, the Pound could fall further following the release of the Bank of England’s (BoE) interest rate and meeting minutes.

It is likely the BoE will leave interest rates unchanged, however if the tone of the minutes is overly dovish and suggests a rate cut may be in the future, the Euro Pound (EUR/GBP) exchange rate may rise.

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TAGS: Euro Pound Forecasts