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Euro Rates Remain Under Pressure after Latest Italian Banking Sector Drama

Although the German Ifo business confidence index jumped higher in June this was not enough to particularly shore up the Euro at the start of the week.

This stronger showing indicated that the Eurozone’s powerhouse economy remains in a relatively robust state of health, giving investors fresh cause for confidence.

However, the mood towards the single currency was somewhat muted as the Italian banking sector returned to the spotlight.

While Rome intervened to wind down two failing regional banks, sparing bondholders from a bail in, the appeal of the Euro was still diminished.

Even so, this downside is likely to be limited in the longer term, as researchers at ING noted:

‘With investors well aware of this risk, the ECB floating a credible threat to do “whatever it takes” to save the euro and EUR looking meaningfully undervalued, the bar for a risk premium driven EUR decline is set very high at this stage.’

EUR exchange rates could come under greater pressure in the coming week, however, as markets await the latest German consumer price index report.

If inflationary pressure strengthened in June the mood towards the Euro could improve sharply, with the chances of the European Central Bank (ECB) taking a more hawkish outlook likely to strengthen.

On the other hand, fresh signs that inflation in the Eurozone is struggling to maintain its earlier momentum could leave the single currency on the back foot.

EUR GBP Trends Lower on Hopes of Imminent Conservative-DUP Deal

Even as a sense of political uncertainty continued to hang over the UK outlook the Pound found a rallying point on the back of May’s BBA loans for house purchase data.

As mortgage approvals failed to fall as far as forecast investors were encouraged to take a less pessimistic view of the health of the domestic housing market.

The Euro Pound exchange rate also weakened in response to the confident tone of the head of the controversial Democratic Unionist Party (DUP), who expressed hope that a confidence and supply arrangement with the Conservatives will be reached soon.

If the minority Conservative government can secure a greater sense of support and stability this would improve the appeal of the bearish Pound.

Fresh volatility is likely in store for the EUR GBP exchange rate, though, with the release of the latest Bank of England (BoE) Financial Stability Report.

Should policymakers express greater worries over the outlook of the UK economy the mood towards Sterling could sour once again.

Speculation over the policy outlook of the Federal Reserve continues to dominate the outlook of the US Dollar, meanwhile.

Policymakers have offered contrasting views on the likely path of interest rates in recent days, undermining bets that the Fed will opt for another rate hike before the end of the year.

If domestic data continues to disappoint, however, the Euro US Dollar exchange rate could make stronger gains.

A weaker showing from the latest personal consumption expenditure report in particular could put significant downside pressure on the ‘Greenback’, given that the index is the Fed’s preferred measure of inflation.

Current EUR GBP USD Interbank Exchange Rates

At the time of writing, the Euro Pound exchange rate was trending lower at 0.8798. Meanwhile, the Euro US Dollar exchange rate was on a downtrend in the region of 1.1179.