GBP/EUR Rate: Gains a Case of Euro Weakness and Not Sterling Strength
The Pound to Euro has maintained recent trading levels as we near the release of the Bank of England (BOE) monthly policy rate decision and quarterly inflation report.
Sterling appears to be holding up for no obvious reasons with analysts grasping at straws in order to explain the gains.
One reason provided, is the residual impetus from the announcement of the June 8 election and hopes it will deliver a sensible exit strategy for the UK, however, this was surely too long ago now to still be influencing the ever-ephemeral markets?
The BOE is expected to downgrade growth forecasts in their inflation report leading - if anything - to disappointment for Sterling bulls.
Growing number of commentators are also now questioning how much easier Brexit negotiations will be in reality even with a substantial May majority.
“The Pound appreciated strongly after the calling of snap elections in June, and did not pull back on the release of GDP data, which disappointed. However, the likely mounting of tensions with the EU over Brexit as soon as negotiations begin leaves sterling exposed to a retreat unless forthcoming data surprise on the upside,” says Italian lender Intesa SanPaolo in a note to clients before super Thursday.
We think the main reason behind GBP/EUR’s recent rise is Euro weakness, following the Macron win.
Not only as a result of profit-taking, but also on diminishing regional risk aversion.
As a general rule, the Euro gains when markets are in crisis mode and falls when they are confident, so Macron may have made life harder for the currency by being the saviour of Europe and a relatively ‘safe pair of hands’.
If today’s data from the BOE results in a downgrade in growth forecasts as expected it will hit Sterling but we may not see much volatility in GBP/EUR since the end result may be that both currencies fall and cancel each other out.
We think nothing short of a signal from the European Central Bank (ECB) of impending normalization of monetary policy will see the pair weaken as low rates in the Eurozone continue to dominate and mould the outlook for the Euro above all other considerations.
