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Less Dovish Draghi Helps Euro Pound Exchange Rate Extend Gains to Fresh Eight-Year High

As the UK and EU delegations return to the negotiating table the Euro Pound exchange rate has benefitted from a fresh bout of Brexit jitters.

While the Conservative government has outlined various proposals and positions on key issues the question of the exit bill remains, having the potential to prevent any major progress towards an agreement and weighing down the Pound.

Confidence in the Euro, meanwhile, strengthened on the back of European Central Bank (ECB) President Mario Draghi’s Jackson Hole speech.

Markets were relieved that Draghi did not make any fresh mention of the relative strength of the single currency, implying that the central bank is not in quite such a dovish mood as investors had feared.

This encouraged bets that the ECB remains on track to start tapering its quantitative easing program sooner rather than later, improving the underlying appeal of the Euro.

With the US Dollar also weakening in response to the latest escalation in tension between the US and North Korea, as well as ongoing doubts over the abilities of the Trump administration, there was little to dampen the appeal of EUR exchange rates.

As the second quarter French gross domestic product pointed towards sustained economic growth of 0.5% on the quarter this also offered support to the Euro on Tuesday morning.

Rising Eurozone Inflation May Extend Euro Bull Run

The EUR GBP exchange rate could make further gains in the coming days if August’s raft of Eurozone consumer price index data proves positive.

Forecasts point towards another modest uptick in German inflation on the year, which could increase the pressure on the ECB to begin tightening monetary policy in the near future.

If inflationary pressure across the currency union shows signs of acceleration this may boost the Euro to a fresh high against the Pound.

Even so, as analysts at Rabobank noted:

‘The good news is that Eurozone inflation is likely to show some pick up in August as preliminary data for the four major countries are released on Wednesday and Thursday. However this uptick is probably driven by higher fuel prices, and the underlying trend therefore remains weak. So while the higher headline numbers may back the ECB in its timing of any tapering announcement (at least in terms of appearances), the Governing Council certainly won’t feel like they have won this match.’

Any weakness in the underlying details of the inflation data could limit any positive boost to the single currency, leaving EUR exchange rates vulnerable to downside pressure.

While Brexit is likely to dominate the outlook for the Pound this week investors may find encouragement in July’s consumer credit and mortgage approvals figures.

So long as the UK consumers continue to demonstrate signs of resilience this should limit the softness of Sterling.

Current EUR GBP Interbank Exchange Rates

At the time of writing, the Euro Pound exchange rate was trending higher around 0.9289. Meanwhile, the Pound Euro exchange rate was slumped in the region of 1.0765.