The ECB Could Further Boost the GBP/EUR Exchange Rate Next Week

• Pound to Euro exchange rate last quote: 1 GBP = 1.1420 EUR
• Euro to Pound Sterling exchange rate today: 1 EUR = 0.8754 GBP

Watch Mario Draghi next week if you are a Euro-bull.

The President of the European Central Bank (ECB) could seek to calm building expectations in financial markets that an imminent announcement detailing an exit from quantitative easing is imminent.

Such a move by Draghi would be negative for the Euro we believe and give the British Pound the chance to add to its current recovery move.

We have seen GBP/EUR crash through a key level of support over recent days leading us to believe the Pound is at risk of a deeper decline. But foreign exchange markets had other ideas and bought the currency with gusto at these cheap levels.

The comeback has been impressive and suggests perhaps the short-term outlook is turning in Sterling's favour.

Draghi to Calm Expectations

Markets have hastily bid the Euro up over recent months in anticipation of the ECB’s move to exit its stimulus programme and raise interest rates in response to improving Eurozone data.

This strength in the Euro partly explain why the Pound to Euro exchange rate hit an eight-month low this week.

But expectations might not be met this July; something that might undermine the currency.

Draghi and his team at the ECB will deliver their latest policy decision next week (July 20) when they meet in Frankfurt.

With expectations high for an exit from stimulus, any disappointing comments might hurt the Euro and give currencies like the Dollar and Pound the chance to recover some lost ground.

“We expect Mario Draghi to adopt a rather dovish tone on the back of the absence of major improvement in inflation dynamics since the June meeting,” says Alan Lemangnen at Natixis in Paris.

A recent change in the narrative among several Board members (linking the appropriate degree of monetary support to economic activity and not only to price dynamics) makes it likely that discussions on recalibration will formally start next week.

There is therefore a risk that the meeting does turn into one that favours a Euro appreciation.

“As we approach the ECB meeting next week we see a risk of a slowdown in EUR appreciation,” says Andrew Cates at Nomura Securities in London. “Even though we expect the ECB to change its forward guidance further, we doubt the change would be a major positive surprise for the market.”

Natixis are not expecting any Euro-positive move either.

However, “we believe that there is neither the ground, nor a consensus among the Council members for removing the dovish bias on the Asset Purchase Programme,” says Lemangnen.

The Asset Purchase Programme is the ECB's quantitative easing programme - a process whereby the ECB prints money to buy government and corproate debt. In doing so it keeps Eurozone interest rates low and allows the economy to expand. This is why it is an important part of the ECB's monetary stimulus programme.

At the ECB's June meeting they gave a more positive spin on the outlook which suggested they were happy with progress being made in the economy, mainly on the back of vanishing deflation risk and firming economic expansion.

“Since then, the lack of improvement in inflation dynamics in June and in the underlying macroeconomic outlook does not make the case for additional adjustments in the forward guidance, in our view,” says Lemangnen.

Furthermore, Natixis are worried that the recent move in the market to push the Euro and Eurozone interest rates higher in anticipation of a tightening move by the ECB might be unwelcome.

In essence, the market is tightening financial market conditions (pushing up interest rates and the Euro) without the ECB’s help - something that the ECB might not like.

Therefore, prompting a decline in the value of the Euro might be a strategy deployed by the ECB.

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Nomura expect the ECB to take another step toward policy normalisation next week by removing its quantitative easing bias from the statement.

This should pave the way for an announcement at the September meeting that tapering will start in January.

But, “no change in the forward guidance or negative comments on the recent market re-pricing from President Draghi could weaken EUR quickly,” says Nomura's Cates.

Nomura are overall bullish on the Euro anticipating a longer-term recovery. However, they are happy to exit their ‘long’ exposure on the currency in anticipation of a period of appreciation.

George Buckley, a currency strategist with Nomura is actually advocating traders buy the Pound against the Euro in anticipating of a recovery over coming days and weeks.

“We see more than enough reason to expect an improvement in Sterling’s fortunes, or if anything a bias to expect further deterioration in EUR against GBP into next week’s ECB meeting,” says Buckley.

Valentin Marinov at Credit Agricole says the ECB is likely to turn a blind eye to the recent rise in the Euro.

The Euro rose this week after ECB Board member Benoit Coeure stated a weaker Euro that has  accompanied the ECB’s stimulus programme was not a policy objective in itself.

“We also think that the markets responded the way they did because the speech made no mention of the latest EUR-appreciation and was therefore seen as a tacit endorsement of the price action in the FX markets,” says Marinov.

This is one reason why Credit Agricole believe the Euro will "reign supreme" going forward.

But Natixis argue that the ECB will want to wait a while longer before inviting any further tightening of conditions which bring with it a stronger Euro.

“We do not rule out that the dovish bias on the APP could be removed at some point, but we hardly see it happening in July,” says Lemangnen.

Natixis are looking for the September meeting to bring about the kind of words Euro-bulls want to hear which could give the Pound a shot at recovering some recent losses next week.

Results of the latest Reuters poll of economists showed that the ECB is likely to announce the next policy shift to a more hawkish narrative in September.

The majority of economists believe the ECB's most likely course of action in September is to announce a tapering of its 60 billion euros of monthly asset purchases, probably starting in early 2018.

Draghi to Speak at Jackson Hole: A Big Hint

With all eyes on the September meeting, it has been announced that ECB-president Draghi will address the Fed’s Jackson Hole meeting at the end of August.

According to officials, he is expected to signal that the ECB will announce at its September 7 meeting that they intend to gradually wind down QE-purchases next year.

“His appearance would be of symbolic value. His last speech in Jackson Hole dates back to August 2014 and was widely seen as heralding the start of asset purchases,” says Piet Lammens, an analyst with KBC Markets in Brussles.

The ECB confirmed Draghi’s attendance some hours after the rumours.