Euro (EUR) Advances before ECB Announcement
The Euro to Pound Sterling (EUR/GBP) exchange rate gained by around 0.8% on Wednesday thanks to the Bank of England (BoE) publishing dovish meeting minutes.
The Euro to US Dollar (EUR/USD) exchange rate also advanced by 0.7% amid bets that tomorrow’s ECB stimulus package will be smaller than initially projected.
According to strategist Roy Teo; ‘We think the ECB will come out with a stimulus program of about 500 billion Euros. That is quite what is the market consensus and if they fail to give up with more forward guidance about what is to come, potentially we could see more short covering in Euros.’
However, if the ECB takes an aggressive stance, the Euro could reverse these gains.
EUR/GBP Down 0.3%, EUR/USD Softer
The Euro to Pound Sterling (EUR/GBP) exchange rate fell by 0.6% on Tuesday while the Euro to US Dollar (EUR/USD) pairing was trending in a narrow range following the publication of worse-than-forecast Producer Price data for Germany.
The annual reading of 1.7% was a four-year low.
Strong ZEW economic sentiment surveys failed to lend the common currency much support as investors fixate on Thursday and the European Central Bank’s (ECB) policy announcement.
Germany’s ZEW economic sentiment gauge climbed to 48.4 from 34.9 while the Eurozone’s index advanced from 31.8 to 45.2.
The Euro’s downtrend against the Pound was also due to expectations that tomorrow’s UK employment report will impress.
The Euro to Pound Sterling (EUR/GBP) exchange rate is currently trending in the region of 0.7663
Euro (EUR) Exchange Rate Trends Higher
Although the Eurozone’s Construction Output report registered a modest monthly decline in November, the Euro managed to hold on to previous gains against both the Pound and US Dollar.
October’s monthly construction output figure was positively revised to 1.1%, put November’s came in at -0.1%.
On the year, construction output rose 2.2%.
Bets that the recent Euro declines were excessive, coupled with concerns that the ECB’s stimulus announcement may fall short of expectations, helped the Euro to Pound Sterling (EUR/GBP) exchange rate advance to 0.7666 and pushed the Euro to US Dollar (EUR/USD) exchange rate to a high of 1.1630.
French President Francois Hollande might have asserted that the ECB has every intention of bringing in quantitative easing on Thursday, but he failed to mention how large the package might be. If it is around the 500 billion Euro level forecast a couple of weeks ago, it will disappoint those hoping for more aggressive stimulus and could trigger Euro gains.
EUR/GBP, EUR/USD Exchange Rates Gain on Monday
Both the Euro to Pound Sterling (EUR/GBP) and Euro to US Dollar (EUR/USD) exchange rates advanced by around 0.4% on Monday as investors bet that the Euro’s recent declines had been overdone.
Expectations that the European Central Bank (ECB) may fail to deliver the extensive stimulus package expected on Thursday also contributed to the Euro’s weakness.
Today’s Eurozone Construction Output report could have an impact on EUR/GBP and EUR/USD trading.
Both the Euro to Pound Sterling (EUR/GBP) and Euro to US Dollar (EUR/USD) exchange rates tumbled last week in chaotic trading conditions.
Euro to Pound Sterling (EUR/GBP) Exchange Rate Falls Beyond 7-Year Low
The UK’s lowest inflation rate for 14 years might have put the Pound under pressure at the beginning of last week, but European Central Bank (ECB) stimulus speculation, soft fundamentals for the Eurozone and a shocking decision from the Swiss National Bank (SNB) saw the Euro plummet against its British peer.
The Swiss National Bank’s unexpected decision to remove its 1.20 cap with the Euro caused extensive and widespread common currency declines.
As well as plunging against the Pound and US Dollar, the Euro lost ground against the Australian Dollar, Canadian Dollar and, of course, the Swiss Franc.
In the view of strategist Nick Beecroft; ‘What brought Euro-Sterling down was the thought that the Swiss National Bank must have known something [about ECB stimulus]. It will be an impressive shock-and-awe announcement.’
Similarly, Anne Van Praagh of Moody’s Investor Service stated; ‘This is a way for the SNB to regain some control over its exchange rate and its monetary policies, which it had lost with its peg to the Euro. The Swiss economy is significantly stronger than the European economy as a whole, so the peg didn’t make much sense and it exposed the Swiss National Bank to big valuation risks.’
The Euro to Pound Sterling (EUR/GBP) exchange rate hit a low of 0.76.
Euro to US Dollar (EUR/USD) Exchange Rate Trends at 11-Year Low
The SNB announcement also drove the Euro to US Dollar (EUR/USD) exchange rate lower.
The EUR/USD currency pair hit an 11-year low over the course of the week even as US data showed a surprisingly steep dip in domestic retail sales and a softening in inflation.
Over the five days the Euro to US Dollar (EUR/USD) exchange rate hit a low of 1.15.
EUR/GBP, EUR/USD Exchange Rate Forecast
Next week the European Central Bank’s policy decision is likely to have a profound impact on the Euro.
As stated by Bloomberg; ‘ECB officials will weigh new stimulus, including quantitative easing, a policy that tends to devalue the local currency and may add to pressure on the Franc against the Euro. QE would also add to the Pound’s strength, pushing it to 70 pence per Euro by year-end.’
If the central bank rolls out a quantitative easing scheme, as many industry experts believe will be the case, the common currency could extend recent declines and may brush fresh lows against peers like the Pound and US Dollar.
Although a ‘leaked’ report indicated that the ECB could introduce a QE scheme worth 500 billion Euros this week, many industry experts have claimed that a much larger programme will be needed to bolster the Eurozone.
The SNB’s recent action also indicates that the central bank has something bigger in store.
The larger the scheme, the more the Euro is likely to depreciate.
Meanwhile, the Euro to Pound Sterling (EUR/GBP) exchange rate could experience fluctuations as a result of the UK’s employment/retail sales figures and the publication of minutes from the latest BoE meeting.
The jobs data is expected to show a decline in the UK’s unemployment rate and an increase in average earnings – both factors which could support Sterling.
However, it won’t be all Pound positive this week as British retail sales are forecast to have fallen by -0.7% in December on the month following November’s 1.7% gain.
The BoE minutes may also show that the two hawkish members of the Monetary Policy Committee (MPC) retracted their votes for immediate interest rate increases at the last gathering.
While the ECB decision will be key, the direction taken by the Euro to US Dollar (EUR/USD) exchange rate could also be dictated by US housing and manufacturing figures.
The US Markit Manufacturing PMI is believed to have risen from 53.9 to 54.
On Sunday the Euro to Pound Sterling (EUR/GBP) exchange rate was trending in the region of 0.7629
On Sunday the Euro to US Dollar (EUR/USD) exchange rate was trending in the region of 1.1567