British Pound to Euro Exchange Rate Falls Back from Highs on Rumours of ECB Rate Hike Debates

While news of a breakthrough in Brexit talks left the Pound far more appealing on Monday, the British Pound to Euro (GBP/EUR) exchange rate was ultimately unable to hold its best levels due to European Central Bank (ECB) rumours supporting the Euro towards the end of the day.

ECB dovishness had been the main cause of GBP/EUR gains last week. The pair climbed from 1.1254 to 1.1341 throughout the week. On Monday though, GBP/EUR quickly jumped to touch a March high of 1.1432 – but ultimately trended closer to 1.1390.

Starting the week off with a busier session than any day last week, negotiators from the UK and EU appeared to agree to a large portion of the Brexit draft deal, signifying that major progress had been made.

Major issues such as the rights of UK and EU citizens following Brexit had been agreed, as well as the terms of a Brexit transition period.

According to the draft agreement, the transition period is expected to last from the 29th of March 2019 until December 2020. It will allow Britain to smoothly exit EU law without the risk of a ‘cliff-edge’ hard Brexit scenario.

The draft agreement also indicates that the UK government will be able to negotiate and sign new trade deals outside of the EU during this period, making investors even more hopeful that a ‘hard Brexit’ could be avoided.

Both UK and EU negotiators acknowledged that there was still much work to be done, but news that the terms of a transition period had been largely agreed made Sterling far more appealing on Monday.

UK businesses lauded the news, relieved that a ‘cliff-edge’ scenario was now perceived as highly unlikely. Bank of England (BoE) interest rate hike speculation flared up following the news.

However, concerns remained about the issue of Ireland’s border. There were still major disagreements over the issue as Northern Ireland wishes to share a soft border with Ireland even after Brexit. This kept pressure on Sterling.

GBP/EUR was also kept away from its best levels on Monday due to reports of rumours that the European Central Bank (ECB) was preparing to shift its debate from bond buying to the path of Eurozone interest rates.

Last week, ECB officials had argued that Eurozone inflation was still too subdued to support tighter monetary policy any time soon and that the bank’s bond-buying scheme may need to remain in place until inflation is more sustained.

But despite the bank’s dovish comments, ECB sources told Reuters on Monday that the bank’s policymakers were increasingly debating over the path that the Eurozone rate path could take.

While the sources indicated that policymakers wanted market expectations to be contained due to slow inflation, the rumoured discussion on rates boosted market bets that the ECB could be preparing to hike Eurozone interest rates as soon as Q2 2019.

Overall though, GBP/EUR advanced on Monday due to news of Brexit developments, and investors are now expecting the major ecostats and central bank news due later in the week.

Tuesday will see the publication of Britain’s February Consumer Price Index (CPI) results. UK inflation is expected to remain strong, but if it falls further than expected, Bank of England (BoE) interest rate hike bets could slip and the Pound would weaken.

Eurozone economic confidence survey stats from ZEW and the bloc’s consumer confidence projections for March will also be published and could support the Euro if they impress.

Britain’s Wednesday data is likely to be more influential. UK job market and wage growth stats from January will be published. As the BoE has recently predicted that UK wages would improve in early 2018, Pound investors will eye these results closely.

However, major GBP/EUR movement is more likely towards the end of the week.

The Bank of England’s (BoE) tone on the monetary policy outlook could be highly influential on Thursday and there could be more Brexit developments at the EU summit from the 22nd to the 23rd.