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Pound Euro (GBP EUR) Slides Ahead of Thursday’s Draghi Speech

  • Pound Euro Slides to 1.1329 – Euro Pound Hits 0.8824
  • UK Public Sector Net Borrowing Drops – Pound Bolstered
  • ECB Draghi Speech Imminent – Euro Gains on Possibility ECB will Follow Suit with the Fed

Whilst the Pound Euro exchange rate climbed yesterday on strong UK retail sales figures, it slipped today in the wake of the US Federal Reserve’s (FED) announcement that it will begin tapering its $4.2 trillion balance sheet in a month, with markets pondering the possibility that the European Central Bank (ECB) will follow suit.

The US Fed announced that they will begin cutting their balance sheet by $10bn per month in October, with Fed Chair Janet Yellen claiming that the normalisation process would be predictable and gradual.

This event added more fuel to the fires of speculation that the ECB will follow suit in moving towards tighter monetary policy in the coming months, especially with members of the ECB already having hinted as much.

In addition, ECB President Mario Draghi is scheduled to speak this afternoon at a conference regarding financial stability, whilst Board Member Peter Praet is due to chair a policy panel at an ECB conference – both events that investors are eyeing on the possibility that the speakers could prove hawkish.

This speculation has driven the Euro higher, despite some positive data prints today from the United Kingdom.

UK Public Sector Net Borrowing Decreases on the Year, GBP Bolstered

The UK public sector borrowed only £5.7bn in August, down some £1.3bn compared to the previous period last year and putting Government borrowing at its lowest figure since 2007, the Office for National Statistics reported.

Whilst the reaction to this news was positive, some economists have warned of caution, as the net debt remains high, having risen to £1.77 trillion at the end of August.

Chief UK Economist at Pantheon Macroeconomics, Samuel Tombs shared this sentiment:

‘Relatively modest public borrowing in August reflects punitive austerity, not a rebounding economy. Total central government receipts fell by 0.1 per cent year-over-year, compared to average growth in the first four months of 2017/18 of 4.5 per cent. The decline was driven by a reduction in departmental expenditure. Total current receipts rose by 3.5 per cent, but this was below the 3.9 per cent average increase seen in the first four months of this fiscal year.”

Year-to-date government borrowing is now at £23.8 billion – that’s £200m lower than a year ago and the smallest August deficit since the financial crisis over a decade ago.

The Pound saw gains against most of the majors on this news, though the Euro’s own robust performance prevented GBP EUR from massively capitalising.

GBP EUR Forecast: Volatility Ahead of Draghi and May’s Speeches

The Pound Euro exchange rate is liable to experience increasing turbulence today and tomorrow in the build-up and aftermath of speeches from Mario Draghi in Frankfurt and UK Prime Minister Theresa May in Florence, though for two very different reasons.

Whilst Draghi is expected to possibly indicate that the ECB will follow in the US Fed’s footsteps in stricter monetary policy, May is expected to deliver a Brexit related speech that will seek to break the on-going negotiation deadlock between the UK and the Bloc.

Judging from news regarding this morning’s cabinet meeting, she could offer the EU some form of deal or proposal, whether it be in the form of a ‘bespoke’ exit deal, or one that uses the framework of agreements between the EU and Switzerland or indeed Canada. Others have also reported that May might offer the EU some £20bn as a proposed divorce figure, helping to dislodge one of the largest sticking points in negotiations so far.

In either scenario the Pound is likely to grow stronger, though markets will be cautious if her stance is deemed too ‘hard-line’ – or liable to cause an abrupt, no-deal exit from the EU.