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EUR/GBP Exchange Rate Rallies as 2016 UK Interest Rate Expectations Dim

Euro to Pound Sterling (EUR/GBP) Exchange Rate Forecast to Surge after ECB Looks to Avoid Additional Stimulus

The Euro to Pound Sterling (EUR/GBP) exchange rate rallied by around 1.7% on Friday afternoon.

With global economic conditions deteriorating, led by emerging market struggles, trader risk aversion strategies have seen the Euro rally versus its peers. This is mostly due to speculation that said conditions will not cause the European Central Bank (ECB) to loosen monetary policy but is very likely to cause both the Federal Reserve and the Bank of England (BoE) to delay cash rate increases. Traders seeking carry trades has also been a significant factor effecting  Euro demand, with a report that suggests many ECB officials do not want to increase asset purchases also supporting the Euro appreciation.

‘The Euro continues to drift higher against both Sterling and the Dollar, as the deterioration in global financial conditions continues to exert downward pressure on market interest rate expectations in the US and UK. With little for markets to price out from what are already very benign rate expectations in the Eurozone, the Euro is rising by default as it were reflecting the Euro‐positive movements in market interest rate spreads, with the price action over the past 24 hours in keeping with this theme: 5‐year swap rates have fallen by a further 6‐7bps in both the US and UK while the equivalent move in Euros has been a much more modest 1bps,’ stated Independent Ireland economist Simon Barry.

The Euro to Pound Sterling (EUR/GBP) exchange rate is currently trending in the region of 0.7656.

Pound Sterling to Euro (GBP/EUR) Exchange Rate Dives after November Construction Output Unexpectedly Contracted

Since the turn of the year the Pound has been outperformed by nearly all of its most actively traded peers, with the exception of commodity-correlated assets. Depreciation was compounded yesterday following the BoE interest rate decision. Whilst it was expected that the Monetary Policy Committee (MPC) would keep outlook unchanged at this juncture, the accompanying meeting minutes were particularly dovish. One of the major factors weighing on policymaker outlook, as highlighted by the minutes, is the forthcoming EU referendum, suggesting that the central bank will not consider a rate hike until after the referendum’s conclusion.

The British Pound extended losses versus a number of rivals today following domestic data showing that construction output weakened in November, compounding concerns regarding tractor-paced fourth-quarter sectoral growth. November’s Construction Output saw a monthly declination of -0.5%; coming in well below the market consensus of 0.5% growth. On the year, November’s Construction Output contracted by -1.1%; again falling well short of the median market forecast of -0.1%. Another disappointing publication today was the BoE Credit Conditions & Bank Liabilities Surveys which reported that UK banks saw a marked rise in demand for personal loans.

This is significant because recently BoE Governor Mark Carney stressed that Britain’s economic recovery is not reliant on growing debt levels amongst households. ‘The increase in unsecured credit availability appeared particularly apparent in other unsecured lending, such as personal loans, where credit scoring criteria were reported to have loosened,’ the BoE said as it released its quarterly survey on Friday.

The Euro to Pound Sterling (EUR/GBP) exchange rate dropped to a low of 0.7525 during Friday’s London session.

Euro to Pound Sterling (EUR/GBP) Exchange Rate Forecast: UK Consumer Prices Data and ECB Rate Decision to Provoke Volatility

Next week will see a number of influential economic data reports with the potential to provoke significant Euro to Pound Sterling (EUR/GBP) exchange rate volatility. For those invested in the British Pound, Tuesday’s inflation data will be of significance. This is because BoE policymakers have highlighted weak consumer prices as one of the most significant stumbling blocks preventing an overnight cash rate hike.

In terms of European data, Tuesday’s ZEW German Economic Sentiment Survey will be significant, but Thursday’s ECB rate decision is likely to dominate focus. Whilst many are certain that the Frankfurt-based central bank will avoid changes to policy at this time, there is still a growing contingent less convinced…a feeling compounded by the most recent minutes publications which saw a number of policymakers call for a deeper rate cut.

The Euro to Pound Sterling (EUR/GBP) exchange rate climbed to a high of 0.7673 during Friday’s European session.