- Investors confident in anticipation of ECB meeting – Euro strengthened as policymakers expected to make no change at this juncture
- UK Retail Sales fell further than forecast in June – Softening economic conditions weighed on Pound demand
- US Dollar on muted form ahead of latest domestic data – Signs of slowdown could push Fed action back further
- EUR GBP exchange rate forecast to benefit from UK PMIs – Markets predict significant slowing in activity post-referendum
On Thursday morning the EUR GBP exchange rate made fresh gains, boosted by discouraging UK sales figures.
The Euro extended gains as the European session continued and the European Central Bank (ECB) opted to leave fiscal policy unchanged.
In an accompanying statement Mario Draghi commented: ‘Over the coming months when we have more information… we will be in a better position to reassess the underlying macroeconomic conditions.’
EUR/GBP hit a high of 0.8382 before edging slightly lower before the close of trading.
The Euro Pound pairing had previously fallen thanks to conflicting easing commentary from the Bank of England and a decline in the UK’s unemployment rate.
The level of joblessness in the UK had fallen to its lowest levels in 11 years in May, with average earnings including bonuses climbing to 2.3% from 2.0%.
(Previously updated 10:00 21/07/2016)
Euro (EUR) Expected to Strengthen on Lack of ECB Action
Ahead of the first post-Brexit meeting of the European Central Bank (ECB), the Euro (EUR) has been making gains against rivals. Investors are generally confident that policymakers will not choose to do anything at this juncture, particularly given that the Bank of England (BoE) failed to act last week in the face of recent market volatility. It seems likely that President Mario Draghi will reiterate that the ECB is still in ‘wait and see’ mode at present, although the impact of March’s raft of loosening measures are likely to have been impacted by the uncertainty that has gripped markets since the UK’s referendum result.
As Derek Halpenny, European Head of GMR at MUFG, noted:
‘We don’t see a big move for the Euro today. Expectations of action are low and if the ECB was to signal an extension of the March 2017 deadline, the reaction is likely to be muted given the ECB has always stated the program could be extended. The ECB is also likely to argue that more time is required to assess the actions already taken.’
Also of interest to markets will be any commentary from policymakers with regards to the crisis unfolding in the Italian banking sector, which could potentially see Italy’s government breach EU state aid rules. If worries continue to dominate the outlook of the sector then the single currency could come under renewed pressure. However, if Draghi does not strike an overly dovish tone then the Euro is expected to trend higher this afternoon.
Disappointing UK Retail Sales Boosted EUR GBP Exchange Rate
Confidence in the Pound (GBP) continued to deteriorate on Thursday morning, with markets discouraged by a particularly sharp decline in the latest UK Retail Sales report. Sales growth in June weakened from 5.2% to 3.9%, a marked drop that would seem to point towards a reduction in consumer confidence even before the ultimate outcome of the referendum vote was known. With sentiment likely to have softened further in July this naturally eroded the appeal of Sterling, despite some pundits blaming the decline on poor clothing sales resulting from bad weather. Nevertheless, investors saw little reason to buy into Sterling, even though Public Sector Net Borrowing also dipped.
Volatility is expected on Friday with the release of the UK Manufacturing, Services and Composite PMIs for July. This will be the first major economic data compiled only in the post-Brexit environment, lending greater importance to the release as this will be markets’ opportunity to gauge the level of detrimental impact that the vote could have had on economic activity. With forecasts pointing towards a fall into contraction territory across the board, the Pound is likely to remain on a weaker footing going into the weekend.
US Dollar Struggled to Make Gains on Mixed Housing Data
Mixed signs from the US housing market have helped to weigh down the US Dollar (USD) this week, with the outlook of the world’s largest economy still seeming somewhat muted. This encouraged speculation that the Federal Reserve is unlikely to achieve its former goal of raising interest rates multiple times before the end of 2016, with traders continuing to price out the possibility of any imminent tightening.
This afternoon’s raft of domestic data could offer the ‘Greenback’ a rallying point, with the Leading Indicators measure predicted to have rebounded from -0.2% to 0.2% in June. On the other hand, the Philadelphia Fed Index is expected to have weakened in July, potentially as a result of market uncertainty. If the results ultimately prove mixed then the US Dollar is unlikely to find any particular support, with weaker data offering less incentive for the Fed to act sooner rather than later.
Current EUR, GBP, USD Exchange Rates
At the time of writing, the Euro to Pound (EUR GBP) exchange rate was making gains around 0.8346, while the Euro to US Dollar (EUR USD) pairing was trending narrowly in the region of 1.1019.