Although the second quarter Eurozone gross domestic product confirmed that growth accelerated to 0.6% on the quarter this was not enough to shore up the Euro.
The Euro Pound exchange rate instead remained under pressure as a result of a better-than-expected UK manufacturing PMI, which highlighted the continued robustness of the sector.
This suggested that the UK economy might get off to a stronger start in the third quarter, following its relatively disappointing performance in the first half of the year.
With investors betting on the prospect of similarly positive performances from the corresponding UK construction and services PMIs the mood towards Sterling turned more bullish on Tuesday morning.
Even so, as Downing Street was quick to shoot down speculation that the UK could be heading for a softer form of Brexit the underlying bias of the Pound remains to the downside.
Pound Volatility Forecast Ahead of BoE Meeting
A rallying point for the EUR GBP exchange rate could well come on the back of the Bank of England’s (BoE) August policy meeting, which is likely to see interest rates left on hold for another month.
While markets have speculated over the possibility of the Monetary Policy Committee (MPC) showing an increasing split any signs of a greater shift towards hawkishness could prompt a Sterling surge.
However, as analysts at Deutsche Bank noted:
‘A historical assessment of the Bank’s reaction function, or lambda, suggests that the MPC could soon start tightening policy based on current growth and inflation forecasts. This is consistent with Carney’s Sintra comments that a withdrawal of stimulus may become necessary as the monetary policy trade-off becomes more conventional.
‘We are sceptical, however, based on a more pessimistic view of the outlook for growth and wages, as well as the risk that Brexit continues to pose to the policy outlook. Our baseline view is unchanged – we do not expect the BOE to tighten monetary policy until Brexit related uncertainties have been sufficiently reduced.’
Any downward revisions to the BoE’s forecasts in the quarterly Inflation Report could weigh heavily on the Pound, given that the outlook of the UK economy remains distinctly uncertain at this juncture.
Dovish ECB Bulletin Could Extend Euro Losses
Confidence in the Euro, meanwhile, could diminish if the latest European Central Bank (ECB) Economic Bulletin points towards the quantitative easing program being left unchanged for some time to come.
Any further display of dovishness from the ECB could leave the single currency on a downtrend, even after the strength of recent Eurozone data.
On the other hand, if the Bulletin highlights greater confidence amongst policymakers the EUR GBP exchange rate could find a rallying point.
Current EUR GBP Interbank Exchange Rates
At the time of writing, the Euro Pound exchange rate was slumped in the region of 0.8932. Meanwhile, the Pound Euro exchange rate was making solid gains around 1.1192.
