Pound Euro Exchange Rate: GBP/EUR Strengthens Once More, Draghi Will Not Fail to Keep EUR Week

Indeed, it could well turn out to be a year of two halves for the GBP on the global exchange rate markets with the latter offering disappointment for those holding out for a stronger rate of exchange.

We do however note the British pound to euro exchange rate (GBP/EUR) is seeing renewed strength having notched up gains to reach 1.2567 at the time of writing (28/08).

(Keep in mind that these are spot market rates to which a discretionary spread is added by your bank/provider. An independent FX provider will however guarantee to undercut your bank's offer, in some cases delivering up to 5% more FX. Please learn more.)

Euro Hit by Draghi

All eyes look towards the next European Central Bank (ECB) meeting in September where new policy measures may be announced. 

At present bets are on the prospect of the introduction of some kind of quantitative easing, something that is euro-negative.

The ECB's President Daghi sounded exceedingly dovish at the Jackson Hole symposium over the weekend as he signaled that action would come as inflation continued to slide.

He acknowledges that an expectation for inflation in the Eurozone has decreased. He stated that “the Governing Council will acknowledge these developments and within its mandate will use all of the available instruments needed to ensure price stability over the medium term.”

"Developments this week have only strengthened our opinion that in the medium-term EUR will continue to depreciate. The pace of deflation in the euro-area has only increased despite the ECBs radical feat of negative interest rates. July headline inflation in the euro area fell to 0.4% from 0.5%, which extends the downwards trend since October 2011. On the growth side, GDP failed to expand in Q2 coming in at 0.0%," says a note from Peter Rosenstreich at Swissquote Research.

GBP Struggles as Inflation, Retail Sales Draw Questions

While the euro struggles we note sterling is not exactly a shining light in global FX. What has gone wrong for the UK currency lately?

A decrease in the rate of inflation to 1.6% for July was announced on Tuesday, which saw this figure drop away from the benchmark inflation figure of 2% set by the Bank of England (BoE)

"Unsurprisingly, this resulted in a sharp drop in sterling across the board, seemingly reducing pressure on the BoE to raise interest rates," says Carl Hasty at Smart Currency Business.

The decline was reversed on Wednesday following the release of momentous minutes from the latest meeting of the Monetary Policy Committee, in which we saw two members voting for a rise in interest rates – the first time in three years.

"Investors looked to cash in as sterling rallied. Lower-than-expected retail sales data from the UK and a raft of positive economic data from both the US and Eurozone on Thursday saw sterling fall again, this time to fresh 4-month lows against the US dollar," says Hasty.

But the Euro Could Fall Too

While the pound struggles on the back of less-than-optimal data releases we note things aren't exactly rosy across the channel.

"Inflation continues to slow, increasing the risk of economy-crimping deflation taking hold. It could be another big figure lower for the euro if Mr. Draghi hints at a growing likelihood of the ECB deploying stronger stimulus such as the bond buying scheme the Fed and other central banks have adopted to push down long-term borrowing rates," warns analyst Joe Manimbo at Western Union.

Draghi Will Deliver a Stronger Pound Euro Rate

According to Swissquote Research it is the European Central Bank's decion making team that are to ultimately aid the sterling euro rate higher.

ECB President Draghi made clear at the August press conference that the ECB stood ready to fight disinflation with “whatever it takes.”

"In our view, Europe data has crossed the threshold. Since policy measures were announced at its June meeting, headwinds to a recovery have only amplified. Yet so have the inflation raising rhetoric," say Swissquote.

The ECB would clearly like more time to assess measures already deployed; further delay is more likely to intensify the complexity of the solution.

"Draghi has a strong track record of delivering timely, market moving, solutions and we don’t expect him to let us down now. The exact nature of the action is still being debated yet undoubtedly ECB’s accommodative stance will expand and extended. In our view impending ECB action will keep EUR weak especially against the USD and GBP," warn Swissquote.