European Central Bank (ECB) President Mario Draghi’s latest comments on monetary policy disappointed markets, leaving the Euro on a weaker footing against its rivals.
Investors had hoped to see some signs of increased hawkishness, even if no change in policy was considered likely at this juncture.
As a result the Euro Pound exchange rate slumped sharply as Draghi’s words proved to be of a more dovish tilt.
Even so, as analysts at Nomura noted:
‘[Draghi] suggested that the Eurozone’s economic recovery was increasingly solid, that downside risks had diminished and that the ECB is “moving toward a more balanced configuration”. In other words, we think the Central Bank is getting a little more confident that a process of policy normalisation may be appropriate in the coming months. However, it is not yet confident enough to offer meaningful language shifts that would convince the market that this process is imminent.’
With both the German and overall Eurozone consumer price indexes for April showing a continued acceleration in inflationary the mood towards the single currency soon picked back up.
If domestic data continues to paint a strong picture then markets could begin to price in higher odds of the ECB returning to a more hawkish outlook in the nearer future.
Developments in Greece could provoke some volatility for EUR exchange rates in coming days, with markets hoping to see the much-delayed bailout review concluded in time for the next Eurogroup meeting.
Demand for the Pound softened, meanwhile, in response to a weaker-than-expected first quarter UK gross domestic product report.
While forecasts had pointed towards a slowing in growth markets were still surprised to see GDP fall from 0.7% to 0.3% on the quarter.
Particularly concerning was a slowdown in service sector activity, given that the sector accounts for roughly 80% of the domestic economy.
With households already showing signs of cutting back as inflation overtakes wage growth the economic outlook does not appear overly encouraging, particularly as formal Brexit negotiations have still yet to get underway.
If April’s raft of UK PMIs also demonstrate a weaker level of economic activity then the EUR GBP exchange rate could extend its gains further after the bank holiday weekend.
Particular focus will be on the latest services PMI, with additional softness likely to weigh heavily on the appeal of the Pound.
On the other hand, if the UK economy demonstrates renewed resilience then confidence in the bearish Sterling could recover.
Current EUR GBP Interbank Exchange Rates
At the time of writing, the Euro Pound exchange rate was trending higher at 0.84. Meanwhile, the Pound Euro exchange rate was slumped in the region of 1.18.
