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Increasingly Hawkish ECB Tone Encourages Strong Euro Pound (EUR/GBP) Exchange Rate Gains

Surprisingly Hawkish ECB Minutes Boost Euro Pound (EUR/GBP) Exchange Rate

As the European Central Bank (ECB) December meeting minutes proved unexpectedly hawkish in tone the Euro to Pound (EUR/GBP) exchange rate returned to a bullish trend.

Investors were generally encouraged by the language on display in the minutes, with policymakers beginning to discuss the possibility of a greater shift towards a monetary tightening bias.

This raised hopes that the ECB could wind down its long-running quantitative easing program sooner rather than later, boosting the Euro (EUR) higher across the board.

Even so, as researchers at Westpac commented:

‘Yet their optimism remained conditional on a policy stance in “crisis configuration” (that is, extraordinarily easy monetary policy). In time, an increasingly self-sustaining growth cycle will see the ECB Governing Council bring asset purchases to an end, and plans to raise rates come to light. We see the first event as occurring at the end of the year (or, if conditions improve further, potentially at the current program’s September end date), but the latter not until well into 2019.’

With Eurozone data largely continuing to outperform forecasts, though, EUR exchange rates saw little reason for weakness ahead of the weekend.

Domestic Political Jitters Limit Pound (GBP) Exchange Rate Upside

Renewed UK political jitters also helped to bolster the EUR/GBP exchange rate, with markets unsettled by the latest debate over the possibility of a second Brexit referendum.

Warnings from London Mayor Sadiq Khan put further downside pressure on the Pound (GBP), as he reiterated the likely negative impact that a ‘no deal’ Brexit could have on the economy.

As the Bank of England’s (BoE) latest Credit Conditions survey pointed towards a decrease in the availability of unsecured credit this sparked some additional concern over the domestic outlook.

With consumers already showing some signs of reining in spending in response to the ongoing wage squeeze, and as high levels of spending have helped to support the UK economy in recent months, the Pound consequently trended lower.

EUR/GBP Exchange Rate Volatility Forecast on UK Inflation Data

The EUR/GBP exchange rate may struggle to hold onto its gains for long, however, as market focus turns towards Tuesday’s UK consumer price index data.

If inflationary pressure eases back to 3% on the year as forecast this could offer some degree of reassurance for squeezed consumers and the health of the wider UK economy.

However, such a result is also likely to diminish the odds of the BoE raising interest rates again in the coming months, with inflation moving back towards its target range.

An upside surprise, on the other hand, could force the BoE’s hand and prompt policymakers to consider tightening monetary policy further in order to properly curb price pressures.

Euro (EUR) Gains Possible as Forecasts Point Towards Widened Eurozone Trade Surplus

More positive data is forecast for the Eurozone next week, offering the EUR/GBP exchange rate more potential support.

Forecasts point towards a fresh widening of the Eurozone trade surplus from 18.9 billion to 28.2 billion in November, signalling the continued strength of the currency union’s economy.

Even so, this may not be enough to keep EUR exchange rates on a bullish footing, as investors have shown some indifference towards the strength of domestic data in recent days.

If the figure falls short of forecast, meanwhile, this could weigh heavily on the EUR/GBP exchange rate at the start of the week.