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Euro to Pound Sterling Exchange Rate Struggles to Advance as ECB Rate Cut Bets Rise

Euro to Pound Exchange Rate Fails Holds above Weekend Levels amid Brexit Jitters

Continued jitters regarding the possibility of a hard Brexit advocating Prime Minister has prevented the Euro to Pound Sterling (EUR/GBP) exchange rate from falling too far this week, but the Euro (EUR) has still been weaker on European Central Bank (ECB) speculation.

Since opening this week at the level of 0.8907, EUR/GBP has trended with an upside bias. While EUR/GBP has been unable to hold this week’s post-January highs of 0.8969, it has still been able to avoid falling below the week’s opening levels.

At the time of writing on Wednesday morning, EUR/GBP trended in the region of 0.8920.

The primary cause of the Euro to Pound exchange rate falling back from its best levels in months yesterday was a notably dovish shift in tone from ECB President Mario Draghi.

The Pound (GBP) was unable to capitalise on the Euro’s losses due to lingering concerns that a no-deal Brexit was becoming more plausible.

Euro (EUR) Exchange Rates Tumble as European Central Bank (ECB) Easing Bets Rise

Mere weeks before European Central Bank (ECB) President Mario Draghi is set to step down from his role at the bank, yesterday saw Draghi prove he still had the ability to send shockwaves through markets as investors reacted to his latest comments.

In a speech at the ECB’s annual conference in Sintra, Portugal, Draghi said that if the Eurozone’s inflation did not improve, the bank would likely have to ease monetary policy in some way.

This included the possibility of an interest rate cut, or the reintroduction of quantitative easing (QE) that was phased out last year.

While analysts had been expecting the ECB to adopt a more cautious tone for some time already due to continued signs of weakness in Eurozone, Draghi’s shift in tone still came as a surprise that led to a rise in ECB interest rate cut bets.

Some now predict that the ECB could cut rates as soon as its July policy meeting. Easing bets had already been rising, so the news didn’t considerably knock the Euro.

Pound (GBP) Exchange Rates Struggle on Boris Johnson’s Contest Lead

As was widely expected by investors, Boris Johnson remained the frontrunner to succeed UK Prime Minister Theresa May in the second round of MP voting.

With more than half the votes of the second place runner-up, Boris Johnson won 126 votes in Tuesday’s second round, making it clear that he was still by far the most likely to become the next Prime Minister.

Johnson has remained an advocate of a harder Brexit. He has said he would renegotiate the UK-EU Brexit deal, but if he cannot then he would rather take Britain out of the EU with no deal than delay the process again.

This has left investors highly anxious, as the perceived chance of a no-deal Brexit keeps rising.

Still, Sterling has avoided further losses as some analysts believe that no-deal Brexit fears are overdone. According to analysts from UBS Wealth Management on EUR/GBP:

‘UBS’s base case is a further extension of the October deadline and eventually general elections in the UK, which should keep the exchange rate in a range around 0.87 (87 pence per Euro) over 12 months,’

Euro to Pound (EUR/GBP) Exchange Rate Investors Await Further Central Bank News

While the European Central Bank (ECB) is not holding a monetary policy decision this week, comments from bank officials over its policy outlook could continue to be influential in the coming days, and Central Bank news from the US and UK could cause movement as well.

ECB President Mario Draghi will hold another speech this afternoon, which could cause Euro movement.

The Federal Reserve will hold its highly anticipated June policy decision this evening, and as the US Dollar (USD) is the Euro’s biggest rival the Euro’s movement could be influenced if the news surprises markets.

Tomorrow’s session will follow with the Bank of England’s (BoE) June policy decision. While not expected to have much impact on Sterling’s direction, it will still be watched closely for possible shifts in tone on rate hikes or Brexit.

Once the week’s most influential Central Bank news has passed, Euro to Pound (EUR/GBP) investors will be focused on tomorrow’s Eurozone consumer confidence data and Friday’s Eurozone PMI projections for June.