EUR to GBP Exchange Rate Rebounds as UK Growth Outlook Drags on Sterling

June 18, 2018 – Written by Ben Hughes

As investors reassessed last week’s Central Bank developments and Britain’s economic outlook, the Euro to British Pound (EUR/GBP) exchange rate recovered slightly from its lows when markets opened on Monday. However, the pair has only recovered around half of the losses seen on Friday last week.

Despite its sharp Friday fall, EUR/GBP didn’t actually shift much last week overall. EUR/GBP opened the week at the level of 0.8738 and closed at around 0.8741 – only a few pips higher. Towards the end of last week EUR/GBP touched on a high of 0.8829 though, and has been unable to recover to that high since Friday’s fall. On Monday, EUR/GBP trended near the level of 0.8760.

EUR Recovers from European Central Bank (ECB) Inspired Selloff

Last week, the Euro saw broad losses as markets reacted to the European Central Bank’s (ECB) latest Eurozone monetary policy outlook.

In its June monetary policy decision, the ECB left policy frozen and detailed its plans to withdraw Eurozone quantitative easing (QE) by the end of the year, as expected.

While this was generally seen as a hawkish move from the bank, more bullish Euro investors were highly disappointed to hear that the bank did not expect to hike Eurozone interest rates at all until mid-2019 at the earliest.

The bank also expressed concerns about US trade protectionism and how it may affect the Eurozone’s economy. Lastly, the ECB lowered its Eurozone growth forecasts for 2018.

Overall, the bank’s caution regarding interest rates and Eurozone growth left the Euro a lot less appealing. Combined with the Federal Reserve’s more hawkish US outlook, these factors caused last week’s Euro selloff.

However, as markets were already betting the ECB would leave policy frozen until late-2019, this news ultimately changed little about the Euro outlook. This helped the Euro to recover some of its losses on Monday.

According to Lefteris Farmakis, Macro Strategist at UBS in London, Euro investors are anticipating upcoming PMI data:

‘The next thing that markets will be watching for is the flash PMIs (Purchasing Managers Index) later this week that will shed some light on the narrative that the Eurozone economy is doing well. If they disappoint, expect more selling’

GBP Under Pressure from UK Growth Outlook and Brexit Jitters

The usual suspects left the Pound unappealing on Monday, as investors remained concerned about signs of slowing UK growth, as well as uncertainties about the direction of the Brexit process.

Following last week’s disappointing UK inflation and wage growth results, investors are more concerned about domestic price pressures and this has weighed on Bank of England (BoE) interest rate hike bets.

On top of that, analysts noted that Britain’s impressive May retail sales results did not hint that underlying household activity was improving either.

Monday saw the British Chambers of Commerce (BCC) publish a report predicting that UK growth would be even slower than expected in 2018 and 2019, and urged the government to act to help businesses.

Sterling has also been under pressure due to market jitters ahead of this week’s upcoming Bank of England (BoE) decision. According to Dan Smith from Thomas Miller Investment:

‘The minutes of the meeting will be closely scrutinised to see whether policy members sit on the optimistic or pessimistic side of the fence in regards to recent data, with the tone of the minutes likely to set expectations over the possibility of an interest rate rise in August.’

EUR/GBP Forecast: Central Bank Speculation Remains in Focus

While not much notable Eurozone or UK data will be published until Thursday, the Euro to Pound exchange rate is most likely to be driven by Central Bank speculation regardless.

Multiple high ranking European Central Bank (ECB) officials will hold speeches in the coming days, including Peter Praet, Benoit Coeure and multiple speeches from ECB President Mario Draghi.

The Eurozone’s April construction output report could influence Euro trade slightly on Tuesday, but if ECB officials make any surprising comments regarding the bank’s monetary policy outlook or the bank’s views on global trade, this is much more likely to shift Euro movement.

Investors will be most highly anticipating the Bank of England’s (BoE) June policy decision however, which will take place on Thursday.

Analysts are hoping for the bank to offer its views on Britain’s latest inflation and growth outlooks, which are likely to influence Sterling this week.

Eurozone consumer confidence will be published on Thursday too, with PMI projections due on Friday. Essentially, most of this week’s most influential data for EUR/GBP traders will come in during the second half of the week.

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TAGS: Euro Pound Forecasts