Pound Euro Exchange Rate (GBP/EUR) Recovers from Hammering, But Uncertainty Lies Ahead

At the time of writing we see the following exchange rates on offer:

• The pound to euro exchange rate (GBP/EUR) is 0.27 pct higher on a daily basis at 1.2577.
• The pound to dollar exchange rate (GBP/USD) is 0.15 pct higher at 1.6811.

NOTE: All quotes here are mid-market - your bank will affix a spread at discretion. However, an independent FX provider will seek to undercut your bank's offer, thereby delivering up to 5% more FX in some cases. Please learn more here.

What are the key events for in the mid-week ahead?

What will be of importance for the pound over the next 5 days, and can it regain the momentum against the euro?

Lloyds Bank Research tell us they are forecasting a soft bias:

"The Quarterly Inflation Report and labour market data for June dominate the UK calendar this week, and it’s hard to see the Inflation Report providing much reason for the market to bring forward its expectation of UK tightening in the current environment.

"Having said that, much of the weakness in GBP in the last few weeks has been down to long positioning and declining risk appetite rather than specific UK issues, so any reversal in the recent weakness in equities may allow a modest bounce. Additionally, the risks are probably that the UK labour market data is on the strong side of market expectations. Nevertheless, we suspect that a lack of encouragement given to UK rate hawks in the QIR will maintain a mild GBP downside bias."

The euro finds strength

The euro powered higher against the pound into the weekend helped by global fund flows.

According to Joe Manimbo at Western Union the moves higher in EUR are a reflection of how it’s been leveraged lately to fund risky carry trade bets.

"With markets taking fright, investors have unwound bets on higher yielders like the Aussie and kiwi that were funded in the lower yielding single currency. But any pop in the euro is likely to soon give way to another bout of weaknes," says Manimbo.

The ECB this week signaled tacit approval of a weaker euro which it sees as positive to help it tackle its dangerously low inflation problem.

"On tap next week are German growth figures for the second quarter. The risk of Europe’s biggest economy contracting last quarter increased as the nation’s trade surplus narrowed more than expected to €16.2 billion in June from €18.8 billion in May," says Manimbo.

No appetite for the British pound at present

Meanwhile, the GBP continues to suffer a distinct lack of enthusiasm.

The pound dollar exchange rate plumbed its lowest level in two months as traders pared exposure to the currency following weaker than expected domestic trade data.

"Britain’s trade gap unexpectedly swelled to £9.4 billion in June from a revised shortfall of £9.2 in May. The bigger deficit can weigh on the next revision to Q2 growth which is due on Aug 15. Any loss of economic momentum would suggest a later rather than sooner U.K. rate rise and weigh on the pound," says Manimbo.

US Dollar takes a pause, but should ultimately dominate

The U.S. dollar’s recent rally paused at the close of the week amid a broad flight to safety across global financial markets.

The USD was pressured by falling US sovereign bond yields with the 10-year note now below the 2.40 percent yield, a 14-month low.

However, "downside risk for the buck should prove relatively mild given the economy’s better performance which has a Fed rate hike more firmly on the table for next year," says Joe Manimbo at Western Union.

However, Omer Esiner at Commonwealth Foreign Exchange reckons we could continue to see near-term pressures:

"The potential for yields to continue to grind low is likely, at least in the near-term, to overshadow the improved economic narrative in the U.S. and the idea that the Fed will continue to move toward more normal monetary policy."