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Will Dovish ECB Minutes Reverse Euro Gains vs Pound, US Dollar?

With markets in a more bullish mood on Thursday the Euro made strong gains against the US Dollar, although the EUR GBP exchange rate remained on a narrow trend.

  • January ECB monetary policy meeting account in focus – Euro could soften on dovish rhetoric
  • Weaker US Dollar benefitted EUR exchange rates – Impact of Hawkish Fed commentary faded
  • Pound recovered ground despite lack of fresh domestic data – Fears of weaker consumer confidence could return on weak retail sales
  • EUR USD unlikely to hold onto gains – Diverging central bank policy predicted to weigh on single currency

Ahead of the release of minutes from the last European Central Bank (ECB) monetary policy meeting, the Euro has been on a mixed footing against its rivals.

Investors are wary that the minutes will offer further evidence of the more dovish bias of the Governing Council, particularly after disappointing fourth quarter Eurozone GDP results.

If there’s no evidence of policymakers having discussed the possibility of tapering the quantitative easing program EUR exchange rates are likely to weaken sharply.

Given the recent dovishness of ECB President Mario Draghi it seems unlikely that the account will display any particular signs of a tightening bias, although any disagreement amongst policymakers could encourage greater confidence in the single currency.

Also in focus will be the latest commentary from Executive Board member Benoit Coeuré, which could underline the Bank’s willingness to leave monetary policy looser for longer.

The Euro has benefitted somewhat on Thursday from the bearishness of the US Dollar, as the positive impact of a more hawkish Federal Reserve outlook diminished.

While Fed Chair Janet Yellen increased the odds of a March interest rate hike with comments that it would be ‘unwise’ to leave rates on hold for too long, political factors are equally driving ‘Greenback’ demand.

Donald Trump’s promise of a ‘phenomenal’ tax plan has boosted risk appetite, meanwhile, giving investors little reason to favour the US Dollar at this juncture.

Even so, the prospect of imminent tightening from the Fed could see the Euro US Dollar exchange rate return to a weaker footing in the near future.

As Sue Trinh, Head of Asia FX Strategy at RBC Capital Markets, noted:

‘The pricing of a Fed March rate hike has climbed from ~30% to 44% while odds of a June hike rose to 80% in the wake of yesterday’s strong US CPI and retail sales reports. Fuelling expectations, Dudley said he sees the balance of risks shifting to more growth than expected (rather than less) and the Fed raising rates a little further in coming months. Rosengren and Harker also signalled the need for a faster pace of hikes.’

Worries surrounding the Pound, on the other hand, have eased in the absence of any fresh UK data or Brexit developments.

This left the Euro to Pound exchange rate on a narrow trend, with Sterling lacking any particularly strong momentum of its own.

January’s UK retail sales figures could give the EUR GBP exchange rate a rallying point, however, as consumer spending is forecast to have slowed on the year.

If sales prove resilient, though, the Pound could recover more of its recent losses despite the likelihood of rising inflation denting confidence in the coming months.