Fresh signs of dovishness from the European Central Bank (ECB) weighed heavily on the Euro in the early week, with the prospect of any imminent policy tightening seeming diminished.
Further downside pressure for the Euro Pound exchange rate came on the back of August’s UK consumer price index data, plunging the pairing to a one-month low.
As inflation jumped from 2.6% to 2.9% on the year this prompted investors to pile back into Sterling on Tuesday morning, even as the squeeze on household finances looks set to worsen.
Markets are hopeful that this fresh uptick in inflationary pressure could encourage the Bank of England (BoE) to take a more hawkish view at its latest policy meeting.
This stronger showing may encourage BoE Chief Economist Andy Haldane to finally break ranks and vote in favour of an immediate interest rate hike, increasing the degree of dissent on the Monetary Policy Committee (MPC).
If Haldane does defect to the hawkish camp this could extend the losses of the EUR GBP exchange rate further, with investors likely to jump on the prospect of an interest rate hike coming sooner rather than later.
However, as James Knightley, Chief International Economist at ING noted:
‘If we do get a 6-3 vote for stable policy it could prompt a re-appraisal of the potential path of interest rates, but we feel that the economic uncertainty brought about by Brexit will lead the committee to hold fire until there is much greater clarity the UK’s post Brexit environment. The inflationary impulse from Sterling’s post referendum plunge will gradually fade through next year and there is a lack of domestically generated price pressures. Even if we do see last August’s emergency rate cut reversed at some point in the next twelve months it is unlikely to mark the start of a tightening cycle.’
Euro Could Find Support on Stronger Eurozone Production Figures
If ECB Vice President Vítor Constâncio adopts a relatively dovish tone in his latest speech this could exacerbate the softness of the Euro further.
Any signs that the central bank is likely to hold off on any tapering of its quantitative easing program in the near future could put significant pressure on EUR exchange rates.
Unless markets see indications that the ECB is likely to adopt a more optimistic policy outlook in the coming months the appeal of the single currency should remain limited.
However, Wednesday’s Eurozone industrial production figures may offer the EUR GBP exchange rate a rallying point if these point towards greater domestic resilience.
As long as Eurozone data continues to paint an encouraging picture of its economic health this is likely to limit the weakness of the Euro.
On the other hand, any downside disappointments would give policymakers further cause for caution and thus diminish the appeal of the single currency further.
Current EUR GBP Interbank Exchange Rates
At the time of writing, the Euro Pound exchange rate was slumped in the region of 0.9011. Meanwhile, the Pound Euro exchange rate was making bullish gains around 1.1096.
