After some initial gains the Euro to Pound exchange rate slumped sharply in the wake of the European Central Bank’s (ECB) policy meeting, with further quantitative easing appearing to be on the table for December.
- ECB commentary prompted volatile Euro movement – Odds of December easing boosted
- Disappointing UK retail sales weighed on Pound demand – Higher inflation expected to weigh on consumer spending in coming months
- UK government borrowing unexpectedly rose in September – Sterling under pressure as deficit worries heightened
- Stronger Eurozone PMIs forecast to boost EUR GBP exchange rate – Robust economic activity expected to point towards diminishing Brexit-based anxiety
However, the Pound also remains on the back foot as disappointing UK data exacerbates concerns over Brexit.
Marked Euro (EUR) Exchange Rate Volatility Triggered by ECB Press Conference
Comments from European Central Bank (ECB) President Mario Draghi prompted significant volatility for the Euro (EUR) on Thursday, with markets rapidly reassessing their view of his tone. While policymakers were indicated to have not discussed an extension of the quantitative easing program or any tapering at the October meeting Draghi did seem to pave the way for further monetary loosening in December. As a result, the Euro to Pound (EUR GBP) exchange rate slumped sharply, quickly reversing the marked gains made at the start of the press conference.
Confidence in the Pound (GBP) was somewhat diminished, meanwhile, with investors discouraged to find that UK retail sales had fallen short of forecast in September. This suggested that consumer spending was already starting to falter, even before the impacts of higher inflation start to filter through into the wider economy. With the outlook of the UK economy still looking bearish there was little reason for investors to support Sterling, although the EUR GBP exchange rate nevertheless remained on a downtrend.
Pound (GBP) Exchange Rates Softened by Higher-than-Expected UK Government Borrowing
Investors were not impressed to find that UK public sector net borrowing had unexpectedly risen in September, with new government debt clocking in at 10.12 billion rather than the forecast 8.5 billion. With markets already concerned by the wideness of the UK’s deficit, given the softness of the Pound and uncertain future trade prospects, this disappointing result undermined the appeal of Sterling further.
Any further developments in the Brexit debate are expected to prompt a reaction from the Pound, with the prospect of a hard divorce from the EU likely to remain a significant downside pressure. As Tim Riddell, research analyst at Westpac, noted:
‘The market should be influenced more by negotiations, but these may well become more opaque in the near term and so depress GBP. Short GBP positioning is still extreme and risk of squeezes remains.’
This is likely to benefit the EUR GBP exchange rate, with even positive UK data unlikely to significantly reverse the current bearish trend of Sterling.
EUR GBP Exchange Rate Forecast to Rally on Bullish Eurozone PMIs
Ahead of the weekend the Euro could find a rallying point on the back of October’s Eurozone Consumer Confidence Index, which is expected to show a modest uptick from -8.2 to -8. This would suggest that sentiment within the currency union has improved somewhat, although the single currency may struggle to particularly capitalise on even a stronger showing here. Investors are expected to remain concerned with the results of a ratings review of Portugal, which could be excluded from the ECB’s asset purchase program in the event of a downgrade.
Greater demand for the common currency may be encouraged on Monday, however, with the latest raft of Eurozone PMIs. Forecasts point towards a strengthening across the board in both Germany and France, something which would indicate that the Eurozone economy remains resilient. If the economic fallout of the Brexit vote continues to fade from the continent then the EUR GBP exchange rate is predicted to trend higher, particularly if market risk appetite diminishes once again.
Current Interbank Exchange Rates
At the time of writing, the Euro to Pound (EUR GBP) exchange rate was slumped at 0.88, while the Pound to Euro (GBP EUR) remained on an uptrend around 1.12.