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
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.