Pound Euro Exchange Rate Rally Undermined by Fresh Uncertainty at the European Central Bank

The British pound (GBP) has enjoyed fresh buying interest against the euro at the start of November while we continue to witness further buying support on dips below 1.60 against the US dollar.

However, on Tuesday we have seen sterling / euro sink lower on rumours that suggest the ECB may hold fire on its euro-depreciating policy making as behind-the-scene squabbles take place amongst governing members. .

Nevertheless, the UK currency ultimately enjoys superior economic performance which will help in the longer-term. This was confirmed by data on the UK manufacturing sector which came in well ahead of market expectations on Monday - this suggests markets may have been caught adopting an overly-negative view on the UK's economic outlook.

The pound to euro rate has powered higher to reach 1.2804 while the pound dollar exchange rate is at 1.6004.

As we can see from the below image, the pound to euro exchange rate (GBP/EUR) could still be on course to test the best levels of 2014 this month as a longer-term rally remains intact:

Don't miss your ideal rate and don't get bitten by adverse market moves, find out how.

P.S: The above quotes are taken from the global FX spot market. It must be noted that your bank will widen the spread on the above numbers when passing on their retail rate to customers. An independent FX provider will however guarantee to undercut the bank's offer thus delivering you more forex. Please see more on this here.

Draghi Annoys His Colleagues, Puts Action in Jeopardy

Eurozone central bankers, who set policy at the ECB, plan to challenge European Central Bank chief Mario Draghi on Wednesday over what they see as his secretive management style and erratic communication and will urge him to act more collegially, ECB sources told Reuters.

The report says Draghi effectively set a target for increasing the ECB's balance sheet immediately after the policy-making governing council explicitly agreed not to make any figure public.

Irritation among national governors who hold a majority on the 24-member council could limit Draghi's space for bolder policy action in the coming months.

Any signs that action is delayed will be positive for the euro as attempts to flood the Eurozone market with even more currency will be delayed.

However, we see this risk as being minor. Rumours, such as this, are often proven to exert short-term pressures.

The Euro's Outlook: Could ECB Unleash a Wild-Card?

The ECB give their latest decision on how best to tackle the moribund Eurozone economy on Thursday, expect volatility to die down ahead of the release.

Commenting ahead of the event, Barclays say:

"In the euro area, the ECB’s meeting followed by President Draghi’s press conference will dominate the agenda this week.

"Both we and the consensus expect no change in policy, with the ECB likely assessing the effect of already announced measures before considering whether additional action is needed. Despite a mild uptick in euro area inflation last week (up to 0.4% y/y from multi-year lows), medium-term inflation expectations remain subdued.

"We continue to think the ECB will have to do more in order to re-invigorate inflation and expect it to commence with EGB purchases as soon as Q1 2015. As a result, we continue to expect significant EUR weakness over the medium term and recommend staying short EURUSD into next week’s meeting."

In terms of data, market attention is likely to be drawn to euro area September retail sales (consensus: -0.8% m/m), German factory orders (Thursday; Barclays: 2.5%; consensus: 2.2% m/m) and German industrial production (Friday; Barclays: 2.0%; consensus: 2.0% m/m).

We will also get the final PMI readings for Germany and the euro area (Monday, Wednesday), where we are in line with consensus and expect no changes.

The Key Events for the Pound This Week

In the UK, attention will once again focus on the BoE, which meets on Thursday.

Markets are unanimous and expect no change in policy and, thus, no statement to be issued.

October’s BoE minutes showed that the MPC is slightly more concerned about the outlook of the UK economy based on a weaker global outlook.

While the MPC still expects robust activity in the coming quarters, the unexpected drop in inflation to 1.2% y/y in September is supportive of the committee’s majority view of insufficient evidence of inflationary pressures.

Nevertheless, Barclays analysts tell us that despite current market pricing suggesting a first hike in Q4 2015, they continue to expect the BoE to hike rates in Q1, while acknowledging that their forecast is highly data-dependent.

If Barclays are correct and the Bank of England does bring forward its first rate hike then this will certainly be a positive for the pound.

Indeed, we could well see the GBP/EUR shoot higher to the 1.3 level.

Data Events

On the GBP side of the pound to euro exchange rate we note volatility could well be derived from a number of data releases.

"Markets will likely focus on UK PMIs, as well as Industrial and Manufacturing Production data, which we expect to be softer overall," say Barclays.

The bank is in line with the consensus on PMI data and expect UK Manufacturing PMI (Monday) to decrease to 51.0 (consensus: 51.4) from 51.6, and UK Services PMI (Wednesday) to decrease to 58.0 (consensus: 58.5) from 58.7.

On Thursday, Barclays' analysts are expecting UK industrial production to decrease by 0.3% m/m relative to consensus expectations of 0.4% m/m, and look for UK manufacturing production to be flat on the month relative to market expectations of 0.3% m/m.

"Overall, softer data are likely to weigh temporarily on GBP next week, but this has not changed our constructive view on the currency, especially versus the EUR," says Barclays.