Pound-Euro Rate Awaits E.C.B's September Policy Meeting

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The Pound is seen holding levels that remain in touching distance of Tuesday's high at 1.1261 with a pound buying 1.1234 euros on the interbank market at the time of writing.

And, we are told Pound Sterling could find itself on the cusp of fresh two-month high against the Euro in the near-term if the European Central Bank (ECB) does what media reports suggest it will and downgrade forecasts for Eurozone economic growth through this year and next. 

The current two-month high is at 1.1292, and the call for a potential rally to these levels comes from analyst Kathleen Brooks at Capital Index.

Driving speculation for a potentially weaker Euro is a Bloomberg News reporte from Wednesday that suggests the ECB will downgrade its forecasts for growth because "external demand" from the U.K. and Turkey has weighed on activity during recent months, citing anonymous officials.

The ECB is due to announce its latest monetary policy decision and economic forecasts at 12:45 pm London time Thursday.

"The release of ECB staff members’ new macroeconomic projections will be of interest," says Joseph Capurso with Commonwealth Bank of Australia.

The ECB currently projects headline CPI inflation to remain at 1.7% over their forecast horizon.

"We will look to see if there are any upward revisions to the inflation forecasts, and economic growth forecasts," says Capurso.

The downward revisions hinted at by the Bloomberg news report could therefore prove to be something of a surprise to the analyst community.

The ECB needs decent and rising levels of economic growth to support a revival of Eurozone inflation toward its 2% target. The bank won't be able to raise its interest rate from crisis levels until inflation can sustainably hold the 2% level.

Any ECB acknowledgement of deteriorating growth prospects could well weigh on the Euro and according to Brooks, there is significance for the Pound-to-Euro exchange rate in what the slowdown might mean for the Brexit negotiations:

"This report is interesting for two reasons, firstly it could put pressure on the ECB to push back on reducing its stimulus programme, although some members including Germany are desperate for monetary support to the come to an end. Secondly, if EU trade to the UK is getting hampered by fears that the UK and EU won’t reach a trade deal in time for the 31st March 2019 Brexit deadline, could this spur the EU to give the UK the Brexit that it wants in order to protect its own economic interests?"

Negotiators from both sides of the English Channel have been attempting to agree terms for the U.K's withdrawal from the EU ahead of the October European Council summit, with a view to negotiating the future trade relationship once the U.K. is in "transition" after March 29, 2019. But differences over how to avoid a "hard border" between Northern Ireland and the Republic have repeatedly stymied meaningful progress during recent months.  

However, Michel Barnier said last week that Brussels is open to considering alternatives to its own proposals and followed that up this week with claims a Brexit deal can be agreed within the next eight weeks. A deal has always had to be agreed before the self-imposed deadline of late October to early November but the optimism from Barnier led markets to believe that the odds of an agreement being reached are rising. 

Brooks posed the following question on Wednesday; "is this one reason why the EU negotiators have softened their stance towards the UK in recent weeks?" referring to the slowdown in external demand from the U.K. and Eurozone growth.

U.K. imports from the EU were worth £341 bn in 2016, or €381 bn at Thursday's exchange rate, which is equal to nearly 4% of the Eurozone's 2016 GDP of €10.7 trillion.

Although the reduction in "external demand" is likely equal to a small part of this already-small piece of the overall Eurozone pie, it will be unhelpful to ECB and EU officials who are seeking to foster faster economic growth, not a slowdown.  

Downgraded growth forecasts would have a negative impact on the Euro Thursday and, to the extent that they are seen auguring a more constructive and conciliatory approach from Brussels in the Brexit negotiations, they could also support Pound Sterling. 

"From a markets perspective, this could support a further decline in EUR/GBP, which has fallen more than 150 pips already since peaking at the end of August. The next key level of support for EUR/GBP is 0.8835, the 200-day simple-moving-average," says Brooks.

In Pound-to-Euro terms, the exchange rate could therefore rise to 1.1318 Thursday if Mario Draghi and the ECB acknowledge the more downbeat growth outlook.

This would be the exchange rate's highest level since early July. 

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