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Solid Eurozone Growth Fails to Shore up Euro Pound Exchange Rate as BoE Split Widens

A better-than-expected raft of Eurozone PMIs boosted confidence in the Euro ahead of the weekend, indicating that the currency union remains in a strong state of growth.

While the odds of the European Central Bank (ECB) adopting a hawkish policy bias in the near future remain decidedly slim this bullish data nevertheless encouraged investors to pile back into the single currency.

Even as policymakers maintain a pessimistic view on inflation within the currency union the underlying strength of the domestic economy increases the pressure on the ECB to consider tapering its quantitative easing program sooner rather than later.

This suggests that the Eurozone could maintain its positive momentum in the coming months, improving the appeal of the Euro in the longer term.

As Chris Williamson, Chief Business Economist at IHS Markit, noted:

‘The upturn is also broad-based, with the surveys signalling an acceleration of GDP growth in both France and Germany in the second quarter, as well as across the rest of the region as a whole, albeit with some loss of momentum seen across the board in June.

‘Job creation continued to run at one of the highest rates seen over the past decade as firms expanded capacity to meet demand.’

Nevertheless, this was not enough to bolster the Euro Pound exchange rate, as demand for Sterling picked up in earnest.

If next week’s German consumer price index report shows another weakening in inflationary pressure then the EUR GBP exchange rate is likely to remain under pressure in the short term.

Pound Remains Vulnerable to Political Uncertainty

Signs of an increasing divide amongst policymakers at the Bank of England (BoE) helped to shore up the Pound this week, in spite of an ongoing sense of political instability in the UK.

While Governor Mark Carney has continued to favour a neutral policy bias comments from the most dovish member of the Monetary Policy Committee (MPC) turned distinctly hawkish.

Chief economist Andy Haldane noted that the withdrawal of some economic stimulus could be necessary in the coming months, suggesting that the notorious dove could vote for an interest rate hike.

However, as a confidence and supply arrangement is still not in place between the Conservatives and the controversial Democratic Unionist Party (DUP) the upside potential of Sterling remains limited.

Although formal Brexit talks have started off on a positive enough note the process is still likely to provoke volatility for the EUR GBP exchange rate over the two year negotiating period.

Should the government maintain a hard line of rhetoric on the matter and talks start to sour the mood towards the Pound could rapidly turn bearish.

Current EUR GBP Interbank Exchange Rates

At the time of writing, the Euro Pound exchange rate was slumped in the region of 0.8778. Meanwhile, the Pound Euro exchange rate was making gains around 1.1392.