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Pound Euro Exchange Rate Forecast: GBP Holding Losses on BoE Carney’s Stimulus Hints

  • Pound Euro Exchange Rate Struggles to Beat 1.21 – Drops below 1.20 after BoE statement
  • UK Leadership Race Has Five Contenders – Frontrunners include Theresa May and Michael Gove
  • Euro (EUR) Holds Ground as ECB Indicates Confidence – Constâncio plays down Brexit
  • Forecast: Will Sterling Drop Further? – Sterling confidence runs low once more

Pound Euro Exchange Rate Holds Losses Despite Manufacturing PMI

After falling on Thursday in response to hints from Bank of England (BoE) Governor Mark Carney regarding the likelihood of more stimulus being introduced, the Pound Euro exchange rate extended losses on Friday despite the UK’s manufacturing PMI showing an acceleration in output before the referendum.

Senior economist Rob Dobson said of the result; ‘With 99% of survey responses received before the end of 23rd June, the latest PMI signalled that the manufacturing sector has started to move out of its early year sluggishness in the lead up to the UK’s EU referendum.’

UK economic concerns left GBP EUR trending in the region of 1.1980.

(Previously updated 08:00 01/07/16)

The Pound Euro exchange rate fluctuated  on Thursday as investors appeared to agree that the 1.21 level was a fair price for Sterling following last week’s unexpected Brexit win.

This is ten cents lower than the 1.31 level Sterling was commanding immediately after the ballots closed last Thursday.

On Thursday afternoon, GBP/EUR dropped below 1.20 to trend in the region of 1.1965, after having not strayed far from levels close to 1.21 for most of the day. After news that the BoE would likely introduce easing measures in the coming months, GBP/EUR fell towards its weekly lows.

Sterling (GBP) Slips as BoE Governor Hints at Cuts

The Pound had maintained steady levels for much of Thursday after its relief rally due to small hopes and speculation within markets that the new Conservative Prime Minister would backtrack on last week’s Brexit vote.

Less than a week after David Cameron announced he would step down, five Conservative MPs officially announced their candidacy to take over by October.

The final list of runners includes Justice Secretary Michael Gove, Home Secretary Theresa May, Minister Andrea Leadsom, MP Liam Fox and DWP Secretary Stephen Crabb. The favourites to win are Michael Gove and Theresa May.

Markets were shocked slightly by the news that ‘Leave’ campaign head Boris Johnson, widely considered to be a favourite to win, bowed out of the competition on Thursday.

There had been speculation that the self-proclaimed man of the people was going to offer a second EU Referendum after last week’s ‘Leave’ win. As this appeared to have been little more than a rumour, Sterling dropped when he announced he would not be running for PM.

However, the Pound began to plummet across the board on Thursday afternoon after Bank of England (BoE) Governor Mark Carney hinted that policy stimulus could be delivered as soon as the next central bank meeting on the 14th of July.

Euro (EUR) Sturdies as Analysts Hedge ECB Rate Cut Bets

The Euro had also been largely affected by news that Britain would be leaving the European Union, as anxiety was rife that other nations would follow a Brexit and undermine the strength of the Eurozone.

However, according to new hints from the European Central Bank (ECB), the central bank may not be in a hurry to introduce economic stimulus as many expected.

As reported by Bloomberg, ECB Vice President Vitor Constancio took more of a wait and see stance when he spoke on Thursday;

‘The ECB’s response to the referendum so far has primarily been to remind lenders of existing liquidity channels and currency-swap agreements, as well as pledging to intervene to safeguard financial stability in the 19-nation bloc if needed. President Mario Draghi limited himself to expressing “sadness” on Monday before flying to Brussels the next day, where he told EU leaders that Brexit could cut euro-area economic growth by as much as 0.5 percentage point over three years.

Constancio signaled that the ECB is in no rush to do more. It has a monetary-policy meeting scheduled for July 21, one week after the next Bank of England rate-setting session.’

With the ECB’s next policy decision meeting not scheduled until late July, a lack of an emergency meeting for the ECB may also signal confidence. The Euro has largely readjusted its position this week, but its losses have been minor compared to Sterling’s.

Pound Euro Exchange Rate Forecast: Will Sterling Hit New Lows?

With one central bank’s reactions down, investors are likely to become anxious again following news that the Bank of England (BoE) would likely be introducing stimulus measures in the next month. BoE Governor Mark Carney stated;

‘In my view, and I am not pre-judging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer …

The committee will make an initial assessment on 14 July, and a full assessment complete with a new forecast will follow in the August Inflation Report. In August we will also discuss further the range of instruments at our disposal.’

As a result, Sterling is likely to remain pressured in the coming weeks as investors attempt to estimate what sort of easing measures will be introduced.

The Euro will likely recover if the European Central Bank (ECB) continues to maintain its current wait-and-see approach. However, Eurozone markets may be negatively affected by Carney’s speech, which could worsen ECB forecasts.

Markets are also likely to watch developments in the UK Prime Minister replacement race. While the process of eliminating the five runners down to two frontrunners will begin next Tuesday, some have speculated that those in weaker positions are more likely to drop out earlier.