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Euro Pound Drops to Weekly Lows despite Eurozone Inflation Projections

  • Euro Pound Exchange Rate at 0.92 – Recovers from dip to 0.91
  • Eurozone Inflation Beats Expectations – Eurozone unemployment mixed
  • EUR Forecast: ECB Meeting Next Week – Euro trade could be mixed
  • GBP Forecast: UK PMIs Ahead – Services and composite on Tuesday

Updated 16:40 BST 01/09/2017:

Euro Pound Weakens on ECB Uncertainty

Investors opted to sell the Euro Pound exchange rate on Friday evening before markets closed for the week, as investors speculated about what tone the European Central Bank (ECB) could take in its upcoming meeting.

The ECB will hold its September policy decision next Thursday.

While analysts previously speculated the bank could announce plans to withdraw quantitative easing (QE) in September’s meeting, more economists now expect the bank will wait until October.

Analysts are also expecting the bank will be cautious and slightly dovish with the QE withdrawal to avoid giving markets a reason to overshoot on the Euro.

Overall, markets are becoming more concerned that the Euro’s strength could be an obstacle for the ECB, causing investors to sell it on Friday.

EUR GBP dropped to a weekly low of 0.9152.

[Previously updated 12:45 BST 01/09/2017]

While up slightly from its worst weekly levels, the Euro Pound exchange rate seems on track to end lower when markets close this evening, as the pair has trended flatly for most of the day.

EUR GBP was trending close to the level of 0.9210 at the time of writing.

The morning’s data didn’t give the pair any directional shifts.

Markit’s UK manufacturing PMI beat expectations, but due to persistent Brexit concerns and anticipation for next week’s services PMI its recovery against the Euro was limited.

[Previously updated 16:49 BST 31/08/2017]

While investors hesitated to buy the strong Euro over the undervalued Pound with just a week until the European Central Bank’s (ECB) September policy decision, the Euro Pound exchange rate edged higher today.

The pair advanced from its weekly low in the afternoon, largely due to the day’s Eurozone inflation stats.

As well as ECB jitters, the Euro may also have been held back by an underwhelming German retail sales report from July.

German retail sales contracted at -1.2% month-on-month, worse than the forecast -0.4%, when the report came in this morning.

[Published 12:53 BST 31/08/2017]

The Euro Pound exchange rate slumped yesterday, but began to recover from its weekly lows today as investors reacted to the latest Eurozone inflation projections. The Euro and Pound could be influenced by manufacturing data on Friday.

EUR GBP began the week trending at around 0.9257 before hitting an 8-year-high of 0.9306 on Tuesday. The pair then tumbled and hit a weekly low of 0.9187 this morning, before recovering to above the level of 0.92 again.

Euro (EUR) Supported by Eurozone Inflation Report

Euro investors looking for more reasons to hope the European Central Bank (ECB) could take a more hawkish tone on monetary policy in the coming months were impressed by today’s Eurozone inflation projection, which beat expectations.

Eurozone inflation was forecast to edge higher from 1.3% to 1.4% year-on-year in August, but according to the preliminary Consumer Price Index (CPI) print yearly inflation looks to have reached 1.5%.

The core inflation projection came in at 1.2%, the same level as July’s core inflation print.

While markets will take the report as more evidence that Eurozone inflation is recovering and the ECB could announce its intention to withdraw quantitative easing (QE) measures within the foreseeable future, some analysts are uncertain.

Peter Vanden Houte, chief Eurozone economist at ING, warned that the strength of the Euro remains a potential concern for ECB officials;

‘The hawks within the governing council will argue that deflationary pressures have now clearly disappeared. But given the risk that an overshoot of the Euro exchange rate could push inflation back below 1.5%, caution remains warranted in removing monetary policy accommodation.

We believe that the ECB will announce a “dovish tapering” in October, giving the markets the impression that quantitative easing could be lengthened into the second half of next year, if need be. At the same time we think that a deposit rate hike is not to be expected before the end of 2018.’

The day’s other Eurozone data was mixed, limiting EUR GBP gains.

German unemployment was slightly worse-than-expected in August, with a change of -5k rather than the forecast -6k. The unemployment rate remained at 5.7% as expected.

The Eurozone’s July unemployment rate also met forecasts and remained at 9.1%.

Pound (GBP) Strength Weighed by Brexit Uncertainties

While some investors bought the Pound up from its lows in reaction to this week’s better-than-expected UK data, the reports were too low-influence to notably improve the Pound outlook.

Mortgage approvals and mortgage lending both beat expectations in July, as did the Bank of England’s (BoE) consumer credit report.

Consumer credit was forecast to rise to £1500m, but instead slowed from £1351m to £1179m. This boosted hopes that UK consumers weren’t ramping up borrowing despite the current pay squeeze.

Sterling was also given a slight boost by GfK’s August consumer confidence report, which came in at -10 rather than dropping to -13 as forecast.

However, Brexit concerns have returned to headlines this week, limiting the Pound’s appeal and recovery potential.

EU chief Brexit negotiator, Michel Barnier, commented on Brexit talks today. He expressed mixed sentiment at the pace of negotiations;

‘We did not get any decisive progress on any of the principal subjects, even though the discussion we’ve had over Ireland, that discussion was fruitful.

Over the course of this week we have made a number of clarifications, useful clarifications, on a number of points.’

Sterling’s gains were limited as investors were concerned that supposedly no major progress had been made in negotiations, since the Brexit process began earlier in the year.

Euro Pound Exchange Rate Forecast: Final August PMIs Ahead

Investors are likely to become more cautious on Euro trade in the coming sessions as the European Central Bank’s (ECB) September 7th monetary policy decision draws near.

As a result, the Pound could drive Euro Pound exchange rate movement as investors react to Markit’s August PMIs, coming in between Friday and Tuesday.

Markit’s Eurozone PMIs are unlikely to inspire much Euro movement unless they differ notably from the preliminary PMIs published earlier in August.

Sterling could see stronger demand at the end of the week if Markit’s UK manufacturing PMI beats expectations. This would push EUR GBP down again.

However, if UK manufacturing disappoints it could increase concerns that Britain’s services PMI will also disappoint.

As services make up a notable portion of Britain’s economic activity, Tuesday’s UK services PMI is likely to be the most influential dataset for EUR GBP trade – at least until next Friday’s ECB meeting.

EUR GBP Interbank Rate

At the time of writing this article, the Euro Pound exchange rate trended in the region of 0.9210. The Pound to Euro exchange rate traded at around 1.0857.