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Could Bank of England Cause Further GBP EUR Recovery This Week?

  • GBP EUR Exchange Rate Recovers to Above 1.10 – Its best level in almost a month
  • Bank of England Speculation Drives Pound – Could the BoE take a more hawkish stance?
  • GBP Forecast: UK Inflation in Focus – With BoE meeting due Thursday
  • EUR Forecast: German Inflation on Wednesday – ECB comments could also influence Euro

The Pound recovery that began at the beginning of the month continued yesterday, as the GBP EUR exchange rate hit its best levels in almost a month – 1.1016. Sterling has been advancing in anticipation of today’s upcoming UK inflation results.

GBP EUR advanced slightly last week, from 1.0920 to 1.0963 despite a brief drop to 1.08. The pair spent most of Monday trending near the key level of 1.10.

Pound (GBP) Advances in Bank of England (BoE) Anticipation

Sterling’s recovery finally got some firmer ground to trade on over the last seven days, as investors reacted to some better-than-expected ecostats.

While Markit’s UK August PMIs fell short of expectations, July’s UK manufacturing and industrial production reports were solid.

Manufacturing production beat expectations in both prints. Monthly manufacturing improved from 0% to 0.5%, beating 0.3% forecasts. The yearly figure jumped from 0.6% to a better-than-expected 1.9%.

On top of this, June’s trade deficit was revised from £-4.56b to £-2.91b and NIESR’s UK Gross Domestic Product (GDP) estimate for the three months into August improved to 0.4%.

This news all supported Sterling’s recovery last Friday, but the Pound continued to rise when markets opened on Monday.

Analysts and investors have turned their attention to Thursday’s upcoming Bank of England (BoE) policy decision and the UK inflation results due before then.

Speculation has flared up once again that if UK inflation rises, the BoE could be pressured into tightening monetary policy sooner than previously expected.

Lee Hardman, currency analyst from Japan’s MUFG, believes recent data has made investors more optimistic about the BoE;

‘The firmer growth developments (last week) should provide more confidence to the BoE that economic growth is still holding up relatively well since the Brexit vote,

We expect the BoE to reiterate this week that the market is underestimating the scale of rate hikes likely in the coming years, although they will likely stop short of signaling a rate hike is imminent this year.’

Euro (EUR) Limp as ECB’s Coeure Hints at Low Interest Rates Remaining

On the other hand, the Euro has fallen back from its highs in recent sessions.

Investors have become concerned that the overvalued shared currency could affect the European Central Bank’s (ECB) monetary policy outlook, due to its potential effect on Eurozone exports.

While last week’s ECB meeting and press conference indicated the bank was likely to move ahead with quantitative easing (QE) adjustment as planned, concerns remain about the bank’s other monetary policies.

ECB President Mario Draghi stated the bank would make most of its major QE decisions during October’s meeting and indicated the Euro’s strength would have little effect on its plans.

However, on Monday investors reacted to fresh comments from ECB official Benoit Coeure.

Coeure indicated that while the bank was not worried about the Euro’s strength, he predicts that ECB policy will remain accommodative for a longer period of time to offset potential issues;

At the current juncture, however, the policy-relevant horizon – the ‘medium term’ concept in our monetary policy strategy – is likely to be longer given the persistence of subdued inflationary pressures.

His statements disappointed hawkish Euro traders hoping that the ECB could begin to tighten monetary policies such as interest rates within the foreseeable future.

Due to strong market focus on the ECB, traders have largely brushed over the Eurozone’s latest notable ecostats.

Italy’s industrial production results from July beat expectations, but with the Euro still overvalued its upside potential is limited and it has been unable to hold its best levels.

GBP EUR Forecast: UK Inflation Outlook in Focus

While the Euro outlook is unlikely to change much before the European Central Bank’s (ECB) quantitative easing (QE) decisions in October, the Pound could see major shifts in the coming days.

First up will be August’s UK Consumer Price Index (CPI) report, due this morning. Analysts predict it will have improved from 2.6% to around 2.8%.

If UK inflation meets or beats expectations, Bank of England (BoE) speculation will flare up and Sterling will continue to advance.

However, even if inflation beats expectations a potential Pound rally could be cut short if the BoE remains overly cautious on monetary policy during its September decision on Thursday.

Sterling will also weaken if inflation comes in lower than expected today.

Euro demand could be influenced by German inflation and Eurozone employment stats on Wednesday, but GBP EUR investors are more likely to focus on central bank speculation.