Homepage » Brexit » 2016 Pound Euro Exchange Rate Falls on BoE’s 2017 Dovishness

2016 Pound Euro Exchange Rate Falls on BoE’s 2017 Dovishness

  • 2016 Pound Euro Exchange Rate Faces Significant Resistance – Can GBP EUR break 1.20?
  • UK Consumer Prices Increase More than Expected – Inflation hits 1.2% year-on-year
  • UK Employment Stats Disappoint – First fall in jobs all year
  • Euro Plunges on Fed Hawkishness – Euro feels negative correlation from USD trade
  • Forecast: Eurozone’s November CPI Ahead – Eurozone inflation expected to contract month-on-month

2016 Pound Euro Exchange Rate Fluctuates Widely as BoE Disappoints

The Bank of England (BoE) met for its final policy decision of 2016 on Thursday afternoon and left UK monetary policy frozen as expected.

The 2016 Pound Euro exchange rate ultimately fell from its daily highs despite trending strongly earlier in the day on Greek economic jitters and a hawkish Fed keeping the Euro weak.

This was largely because the BoE indicated that despite the UK’s strong inflation results earlier this week and the likelihood of further inflation spikes in the year ahead, monetary policy was unlikely to be tightened in the foreseeable future.

As a result, GBP EUR may end the week closer to the week’s opening levels despite nearing the key level of 1.20 at multiple occasions.

(Previously updated 12:46 GMT 15/12/2016)

The 2016 Pound Euro exchange rate edged higher on Wednesday evening and Thursday morning as the Euro was undermined by its negative correlation with the US Dollar.

The Federal Reserve confirmed a 25 basis point rate hike during its policy decision as expected – but also indicated that it intended to hike US interest rates around three times throughout 2017.

This more hawkish-than-expected outlook gave the US Dollar a solid boost on Wednesday and Thursday morning, which weakened the Euro.

Other factors weighing on the Euro on Thursday included an ongoing feud between Greece, the IMF and the Eurogroup on the subject of Greece’s debt relief plans. Investors began to fear once again that debt relief talks may fall apart and that Greece’s economic issues would once again put a big strain on the Eurozone.

(Previously updated 16:23 GMT 14/12/2016)

2016 Pound Euro Exchange Rate Struggles to Hold Highs Ahead of Fed Meeting

Wednesday’s session saw little change in the 2016 Pound Euro exchange rate after the pair fell from Tuesday’s highs. GBP EUR instead fluctuated within a relatively narrow region throughout the day, close to the level of 1.19.

The day’s UK data failed to help GBP trade. Investors were left largely disappointed despite a strong jobless claims report from November, as UK’s labour market saw a loss of jobs in the three months leading to October. This was the UK job market’s first contraction all year which left some traders anxious about whether jobs would suffer further in the coming months.

As for the Euro, the shared currency saw muted trade throughout the day as investors prepared for the evening’s highly anticipated Federal Reserve meeting.

However, the shared currency strengthened slightly later in the day thanks to news that Italy’s upper senate house had voted in confidence for Italy’s new Prime Minister, Paolo Gentiloni. This relieved some of the political uncertainty that had weighed on Eurozone markets in recent weeks.

(Published 07:00 GMT 14/12/2016)

The 2016 Pound Euro exchange rate jumped to a new weekly high on Tuesday. The day’s UK Consumer Price Index (CPI) results were the main reason behind this increase.

Weak Euro trade saw GBP EUR advance, but faced psychological resistance as it neared 1.20. As the European session drew to an end, the pair retreated from its daily highs.

2016 Pound Euro Exchange Rate (GBP EUR) Bolstered by Better-than-Expected UK Inflation

After trending steadily on Monday due to ongoing hopes for a transitional Brexit deal or some way for UK citizens or businesses to maintain access to EU membership, the Pound saw a notable increase in value on Tuesday morning.

Tuesday’s session saw the publication of Britain’s November Consumer Price Index (CPI) results. These were expected to improve to 0.2% month-on-month and 1.1% year-on-year but the yearly results were even better than expected.

Monthly inflation figures came in at 0.2% as projected, while the yearly inflation result hit 1.2% – a considerable improvement from the previous score of 0.9%. Core inflation also improved beyond expectations, from 1.2% to 1.4% year-on-year.

These results indicated that UK inflation was beginning to feel the effects of the Pound’s drop in value and many forecasters reiterated their calls that more inflation was on the way.

Some analysts even began to suggest once more that these increases in inflation may pressure the Bank of England (BoE) into hiking UK interest rates in the coming months. Nick Dixon from Aegon stated;

‘Low interest rates are reaching the end of the road. Inflation is now on the rise and sentiment amongst monetary policy makers is hardening in the UK and US. With expectations that UK inflation will exceed its 2% target in early 2017, we can expect monetary belt tightening during the next 6-9 months.’

However, not all investors were willing to bet on tighter monetary policy, careful to keep in mind the BoE’s previous warnings that GBP-influenced inflation spikes were likely to be brushed over. This left GBP weaker towards the end of the day.

Euro Limp as Italian Banks Concerns and Imminent Fed Meeting Weigh on EUR Trade

Demand for the Euro was low on Tuesday as foreign exchange markets focused increasingly on the US Dollar and Wednesday’s highly anticipated Federal Reserve meeting.

Due to the Euro’s negative correlation with the US Dollar, the shared currency weakened as traders firmed on the USD, expecting the Fed to hike US interest rates.

Other more local factors have also held back the Euro this week however. While the shared currency performed decently on Monday due to news that Italy’s President was planning a technocratic government following the resignation of Matteo Renzi last week, concerns about the Eurozone’s future remained.

Italy is still amidst a banking crisis that is perceived by some analysts as having the potential to cause political instability in the nation.

Italy’s third largest bank, Monte dei Paschi, is in danger of collapsing. Some believe this could cause an increase in favour for the nationalist, anti-establishment Five Star Movement party. This concern as well as the strength of the US Dollar kept EUR trade weak on Tuesday.

2016 Pound Euro Exchange Rate Forecast: UK Employment Results and Fed Meeting Ahead

Wednesday is set to be a highly important day for foreign exchange markets, but the biggest event (and the one traders will prepare all day for) will not take place until after the end of the European session.

The Federal Open Market Committee (FOMC) will be holding its decision on US monetary policy during Wednesday’s American session and bets of a US rate hike are still over 95%.

As on Tuesday, negative correlation with the US Dollar is likely to cause weak Euro trade throughout Wednesday even if the day’s October Eurozone industrial production results beat expectations.

This means GBP EUR is likely to continue its advance throughout the day, even if Britain’s October employment report disappoints traders. The November jobless claimant rate is expected to stay at 2.3% and October’s unemployment rate is predicted to remain at 4.8%.

However, in a more long-term outlook UK markets could have some more concerns on the horizon as most analysts predict that UK inflation is likely to continue increasing in the coming months.

If the Bank of England (BoE) continues to refuse to tighten monetary policy despite higher inflation, this could destabilise an already uncertain mid to long-term UK economic outlook.

As a result, while the 2016 Pound Euro exchange rate currently has an upside outlook, things continue to look murky for the Pound going forward into 2017.