Waning ECB Influence Could Cap British Pound to Euro Exchange Rate's Recovery this Week

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The big event for the Euro exchange rate complex in the week ahead is the ECB meeting, which could well leave the shared currency stronger.

  • Pound to Euro exchange rate today (Weekend, market closed): 1.1921
  • Euro to Pound Sterling exchange rate today: 0.8393

The European Central Bank’s (ECB) policy meeting to be held on Thursday the 8th September will be the event of the coming week for foreign exchange rate movement.

The Euro has been weakened notably over recent years by the ECB’s policy of slashing interest rates and buying a wide range of corporate and government bonds.

This has allowed both the Pound and US Dollar to register notable advances since 2010.

Of course, the Pound has since fallen back thaks to the EU referendum vote to exit Europe, which in turn invited a fresh policy response from the Bank of England that has undermined the local unit.

Weakness in GBP/EUR has since been constrained with the lows in the 1.14’s giving way to a recovery rally, largely aided by better-than-forecast economic data releases.

Looking ahead, there will be some key data points out of the UK economy that will further inform this trend - notably the Services PMI release on Monday the 5th and Industrial Production data for Wednesday the 7th.

Yet, the big driver of the week could well be the Euro’s response to the ECB’s policy decision on Thursday.

However, of late, there has been growing evidence that the ECB is losing its ability to both weaken the Euro and boost inflation.

There are suggestions that the September interest rate meeting may bring with a further cut to interest rates and/or an increase in the asset purchase programme.

This is largely based on the observation that recent inflation data have confirmed inflation remains stubbornly low.

Despite the prospect of further action, there are suggestions that the ECB has simply emptied its armoury and the Euro’s most likely response will therefore be to strengthen. 

This will provide a major pain-point for the GBP/EUR's recovery and strength may well remain limited as a result.

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