- IMF pushes for Greek debt relief – Euro weakened by concerns over future of bailout program
- Bets rise on Fed rate hike in June – EUR/GBP exchange rate slumped as FOMC policymakers maintained hawkish tone
- UK wage growth stronger-than-expected – Pound strengthened despite persistent ‘Brexit’ uncertainty
- ECB minutes forecast to trigger Euro volatility – Dovish signals could increase odds of further policy easing
UK Retail Sales Could Send EUR/GBP Lower
As European markets opened on Thursday the Euro was left trending in a narrow range against the Pound, having fallen against the British currency on Wednesday as a result of the reduced odds of the UK voting to ‘Brexit’.
The EUR/GBP exchange rate could drop in the hours ahead however if the UK’s latest retail sales report fails to show the increase in consumer spending forecast by economists.
The Euro to Pound currency pair is currently trending in the region of 0.7691.
Pound Sterling (GBP) Boosted by Referendum Poll Optimism
The latest IPSOS MORI poll prompted the Pound (GBP) to rally strongly across the board on Wednesday, as the ‘Remain’ campaign was placed at 55% to the ‘Leave’ camp’s 37%. This prompted the Euro to Pound Sterling (EUR/GBP) exchange rate to slump sharply to 0.7715 towards the close of the European session.
Euro Sentiment Weakened by Worries over Greek Bailout Developments
Declining safe-haven demand softened the Euro (EUR) on Tuesday morning, helped by comments from European Central Bank (ECB) chief economist Peter Praet. As Praet warned that European banks potentially face a ‘severe profitability shock’ concerns over the outlook of the local banking sector were raised.
The International Monetary Fund (IMF) also stirred up worries over the Greek bailout, by indicating that it could walk away from the current arrangement without Greece being given debt relief until 2040. With any delay in the release of the Hellenic nation’s next tranche of bailout funds likely to jeopardise hefty debt repayments due over the summer, this naturally reignited concerns over a possible rerun of the Greek debt crisis.
Confidence in the Pound (GBP) declined, meanwhile, thanks to a weaker-than-expected April Consumer Price Index report. Domestic inflation was found to have slipped from 0.5% to 0.3% on the year, suggesting that slowdown pressures on the UK economy have continued to hamper growth. However, the bearish impact of this disappointing data was somewhat muted by the latest ICM phone poll, which indicated that the ‘Remain’ campaign had extended its lead in the UK referendum during the last month.
Heightened Chances of June Fed Hike Weighed on Euro (EUR) Exchange Rate
Following stronger US inflation data investors were inclined to resume speculation over the possibility of a June interest rate hike from the Federal Reserve. Members of the Federal Open Market Committee (FOMC) have also been more hawkish in recent days, with Atlanta Fed President Dennis Lockhart suggesting that markets are underestimating the chances of an imminent rate hike. This boosted the US Dollar (USD) strongly and the Euro consequently weakened, made vulnerable by worries of greater policy divergence between the Fed and the ECB.
The Euro to Pound Sterling (EUR/GBP) exchange rate extended its downtrend on Wednesday in response to the latest UK employment data. Average weekly earnings unexpectedly strengthened in the three months to March, rising from 1.8% to 2.0%. This positive sign of wage growth offered some reassurance in the outlook of the domestic economy, suggesting that the negative impact of referendum-based volatility has been more limited than previously thought.
Nevertheless, concerns remain over recent signs of economic slowness, which could hamper growth for some time as James Knightley of ING noted:
‘The referendum is right at the end of the second quarter and it is unlikely that businesses would suddenly start to spend immediately at the beginning of 3Q. As such we are thinking that growth is more likely to recover strongly in 4Q16/1Q17, which dramatically reduces the likelihood of a 4Q rate hike from the Bank of England.’
EUR/GBP Exchange Rate Forecast: Dovish ECB Minutes Could Extend Euro Slump
Thursday’s ECB meeting minutes could bolster the appeal of the Euro, however, if policymakers are shown to have expressed less dovish sentiments. Greater signs of hawkishness would undermine the likelihood of further policy easing in the near future, prompting the single currency to rally. However, if there are continued suggestions that interest rates could go lower the Euro could weaken across the board.
Demand for the Pound could remain bullish if the UK’s April Retail Sales show improvement. Forecasts point towards a steady uptick in sales growth on the year from 1.8% to 2.0%, which could further allay fears of the damage caused by ‘Brexit’ uncertainty.
Current EUR, GBP Exchange Rates
At the time of writing, the Euro to Pound Sterling (EUR/GBP) exchange rate was slumped around 0.7813, while the Pound Sterling to Euro (GBP/EUR) pairing was making gains in the region of 1.2798.