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Comments from ECB’s Draghi May Have Been Misinterpreted, Pound Euro Exchange Rate Recovers

  • Pound Euro Recovers to 1.13 – Recovers from lowest 2017 levels
  • ECB President Surprises Traders – Though his hints may have been misinterpreted
  • GBP Forecast: UK Growth Data Due Friday – Euro more likely to move GBP EUR
  • EUR Forecast: Eurozone Inflation In Focus – Germany’s June CPI due Thursday

Markets may have misinterpreted European Central Bank (ECB) President Mario Draghi’s Tuesday statements, according to ECB sources who spoke to Reuters on Wednesday. As a result, the Pound Euro exchange rate quickly recovered as the Euro shed its Tuesday gains.

Draghi had reportedly intended to prepare markets for the possibility that policy adjustment could be discussed later in the year, without making any commitment to action.

On the other hand, the Pound saw a surge in demand on Wednesday following unexpected comments made by Bank of England (BoE) Governor Mark Carney at the ECB Forum in Portugal.

Carney stated that if Britain’s economic outlook firms, it may be necessary for the bank to withdraw some of the aggressive monetary stimulus it introduced in August 2016’s meeting.

While analysts argued markets may be once again overlooking the caveats and small print, it nonetheless marked a shift in tone from the BoE boss.

[Previously updated 12:46 BST 28/06/2017]

After a brief recovery attempt on Wednesday morning, the Pound Euro exchange rate continues to trend near its worst 2017 levels at the time of writing.

GBP EUR has hit a new 2017 low of 1.1261, the pair’s worst level since November 2016.

The Euro was briefly weakened by the morning’s news that Italian inflation projected to contract again, at -0.1%, in June. However, Euro traders are staying positive ahead of key German and Eurozone inflation stats due before the end of the week.

ECB President Mario Draghi will be holding another speech on Wednesday afternoon. Any indication that he may go back on the surprising tone seen earlier in the week would help GBP EUR to recover.

[Published 07:00 BST 28/06/2017]

The Pound Euro exchange rate tumbled on Tuesday as the latest Brexit and political developments in Britain failed to support Sterling, while the Euro was boosted by an unexpectedly hawkish tone from European Central Bank (ECB) President Mario Draghi.

GBP EUR had trended largely limply from the week’s opening levels of 1.1360 until Tuesday morning, when the pair sharply dropped. It lost around half a cent and trended in the region of 1.1315 on Tuesday afternoon – its lowest level in two weeks.

Pound (GBP) Fails to Find Support from Political Developments

The beginning of the week saw the UK Conservative party finally agree to a deal with Northern Ireland’s Democratic Unionist Party (DUP).

The UK government would invest £1bn in Northern Ireland in return for the DUP’s backing in certain vital Commons votes, such as the Queen’s Speech vote set to take place this week.

As investors had expected a Conservative/DUP deal, this news failed to give the Pound a notable boost. Instead, traders remain anxious about the long-term stability of the deal.

Speculation that UK Prime Minister Theresa May could face a challenge for the Conservative party leadership in the coming months has left Pound traders nervous.

Brexit comments from Theresa May have also failed to give the Pound any extra support this week. May made an offer on EU citizens’ post-Brexit rights, stating they would be given the option to work up to having similar rights to UK citizens.

However, May’s offer has been criticised by EU citizens and EU negotiators as lacking in clarity and guarantees. EU negotiators have argued that EU citizens living in Britain deserve the same level of protections they currently have under EU law.

This worsened market concerns that the UK government would have a weaker negotiating position during the Brexit process than hoped, and may struggle to successfully negotiate an impressive trade agreement.

Euro (EUR) Demand Surges as Draghi Surprises Markets

Despite a relatively quiet Eurozone calendar on Tuesday, demand for the Euro shot up in the morning following a speech from European Central Bank (ECB) President Mario Draghi at an ECB Forum in Portugal.

Draghi was pleased to note that economic recovery in the Eurozone was becoming stronger and broader and that there had been 16 consecutive quarters of growth in the bloc.

Markets quickly became excited when Draghi stated that the Eurozone’s deflationary pressures were being replaced with reflationary ones, as well as indication from Draghi that the central bank had to be ‘prudent’ with how it advanced on monetary policy going forward.

This was the biggest news of the day to financial markets, who took Draghi’s comments to mean that the ECB would begin to discuss altering monetary policy sooner rather than later.

Following his speech, investors bet that the ECB would be reining in some of its aggressive stimulus package within the foreseeable future, which led to a big boost in Euro demand. According to Chris Beauchamp, chief market analyst from IG;

‘Mr Draghi continues to argue that his policies are behind the overall improvement in Eurozone economies, but it was his shift of emphasis from ‘very substantial’ to ‘considerable’ where stimulus was concerned that really got everyone talking.

This Delphic hint that a reduction in QE [quantitative easing] was possible was sufficient to send the Euro higher.’

Pound Euro Forecast: Eurozone Inflation Stats Anticipated

The Euro is likely to continue driving Pound Euro exchange rate movement for the rest of the week, as preliminary June inflation stats from various key Eurozone nations will begin to come in over the coming days.

Wednesday will see the publication of Italy’s preliminary June inflation stats, which are projected to remain at 1.4% year-on-year and improve slightly from -0.2% to 0.1% month-on-month.

Investors will be hoping for Eurozone inflation to continue gradually improving, so worse-than-expected inflation could cause the Euro to shed some of this week’s Draghi-related gains as weak inflation data would cause ECB tightening bets to drop.

The same goes for Spain’s, Germany’s and the Eurozone’s overall preliminary June inflation reports, which are all due towards the end of the week.

With French consumer confidence data also coming Wednesday, followed by Eurozone business confidence on Thursday and German unemployment data on Friday, the latter half of the week will continue to be very busy for Euro trade.

As for the Pound, Bank of England (BoE) Governor Mark Carney will hold a speech on Wednesday. However, being just a day after his comments around the BoE financial stability report, the speech is unlikely to offer markets any surprises.

Investors are more likely to wait for Friday’s key session, which will see the publication of Britain’s final Q1 Gross Domestic Product (GDP) results. If they surprise they could definitely influence the Pound Euro exchange rate.