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Euro Strengthens Against Pound, US Dollar in spite of Dovish ECB Economic Bulletin

In the wake of the first Federal Reserve policy meeting of 2017 the Euro has trended higher against the US Dollar, benefitting from a lack of clear signalling for the timing of its next interest rate hike.

  • ECB continued to talk down possibility of QE tapering – Policymakers maintained view that inflation remains unconvincing
  • EUR GBP exchange rate boosted ahead of BoE meeting – Pound jittery despite hopes of upward revision in growth forecasts
  • US Dollar dented by disappointing Fed commentary – Odds of imminent interest rate hike remained limited
  • Euro could weaken in response to softer Eurozone retail sales – Loss of consumer confidence may diminish appeal of single currency

Even though Brexit-based jitters eased somewhat the Pound remained on a weaker footing, giving the EUR GBP exchange rate a boost.

Euro Bullish Despite ECB Dismissing Signs of Rising Inflation

Despite the unexpected strength of recent Eurozone data the latest European Central Bank (ECB) Economic Bulletin proved disappointing. The appeal of the Euro (EUR) diminished as the report underlined the central bank’s view that there are not any signs of a ‘convincing upward trend’ in inflation, reducing the odds that the quantitative easing program will be tapered in the near future. However, as the Eurozone producer price index for December bettered expectations, surging from 0.1% to 1.6%, the Euro remained on a stronger footing against both the Pound (GBP) and the US Dollar (USD).

Expectations are not particularly positive for December’s Eurozone retail sales figures, though, which could see the single currency weaken ahead of the weekend. Consumer spending is expected to have dipped from 2.3% to 1.8% on the year, which could suggest that confidence within the currency union has softened. Worries over Greece could equally dampen demand for the Euro, as the Hellenic nation remains in a deadlock with creditors over the future of its bailout program.

EUR GBP Exchange Rate Trended Higher Ahead of BoE Inflation Report

Confidence in the Pound weakened once again on Thursday morning, with markets bracing for the latest Bank of England (BoE) policy meeting. Although interest rates were not expected to see any change at this juncture investors were looking for any indication of increased hawkishness amongst policymakers. An upward revision to its growth forecasts could encourage investors to pile back into Sterling, even though Governor Mark Carney is likely to maintain a more neutral outlook on interest rates.

As Alia Mihr, analyst at Danske Bank, noted:

‘We think the BoE is reluctant to indicate rate hikes at a time of elevated political uncertainty. As we think the BoE will continue to signal slower growth/higher unemployment in the updated projections, we think it will see through inflation moving above target if it is only temporary due to the weak GBP.’

January’s UK Services PMI will also be in focus as investors look to gauge the current health of the domestic economy. With forecasts pointing towards a moderate dip from 56.2 to 55.8 this could dent the Pound further, particularly if the report highlights a strong increase in inflationary pressure. Given that the service sector accounts for the majority of UK economic momentum any signs of softness here could give the Euro Pound (EUR GBP) exchange rate a solid boost.

Less Hawkish Fed Meeting Weighed on US Dollar (USD) Outlook

The Federal Reserve disappointed markets at its January meeting as it failed to signal the likely timing of its next interest rate hike, indicating that monetary policy is unlikely to be tightened further in the near future. This prompted the ‘Greenback’ to trend lower across the board, particularly as the new US administration continued to provoke a sense of uncertainty and bolster its isolationist outlook.

Fresh volatility for the Euro US Dollar (EUR USD) exchange rate is expected in response to Friday’s Non-Farm Payrolls report, which could see a sharp increase in US employment. A strong showing here could encourage the Fed to take a more hawkish view in the future, with the labour market holding up well in spite of recent political turmoil. Even so, if wage growth proves less encouraging the US Dollar may struggle to make any substantial gains.

Current Interbank EUR, GBP, USD Exchange Rates

At the time of writing, the Euro Pound (EUR GBP) exchange rate was trending higher at 0.85, while the Euro US Dollar (EUR USD) pairing was making gains in the region of 1.08.