19 July, 2017
The dollar hit its lowest against the euro and Swiss franc in more than a year on Tuesday, with the broader dollar index touching a more than 10-month low, on reduced confidence in U.S. President Donald Trump's agenda and jitters over hawkish central banks overseas. There are some major changes in market dynamics going on at the moment and though the uptrend is clear in this pair, the traders have to wait for the right price regions to go long. EUR/GBP has advanced from 0.8754 to around 0.8850 so far this week.
As per an article published on Morningstar, "one reason to end QE soon is that the European Central Bank is expected to struggle to find enough bonds to buy later next year.... the European Central Bank to purchase only up to 33% of any Eurozone government's debt, could prove legally and politically tricky....economists also worry increasingly about a build-up of financial risk after years of ultra-low interest rates".
Analysts have argued for both possibilities. Some believe the bank will announce the end-date of its QE program during September's policy decision, while other reports suggest the ECB is hesitant to announce or hint at any end-date until it is confident the stimulus has done its work.
"A strong euro has also raised expectations that they will not sound overly hawkish", said Benjamin Schroeder, a rates strategist at ING.
Eurozone inflation met expectations in June, ZEW's July economic sentiment surveys fell short of expectations, and Eurozone construction output in May slowed from 3.3% to 2.6%.
GBP Edges Away from Weekly Lows Some investors bought the Pound from its cheapest levels on Wednesday. Lower inflation issues are being viewed as short-lived by Draghi, as per an article published on MarketWatch.
Data this week confirmed that euro zone inflation remains tame at 1.3 percent - well below the ECB's near 2 percent target - while further strength in the single currency could dampen inflation by keeping down import costs.
"Together with this, the European Central Bank could add that the duration part of QE will be reconsidered at the meeting in September, when the European Central Bank has updated inflation projections". If inflation continues to slow and wage growth improves, the pay squeeze would lighten and United Kingdom consumers would be able to spend more comfortably.
As Britain's economy is heavily consumer-facing, a boost in consumer activity would benefit Britain's Gross Domestic Product (GDP) growth.
The Pound to Danish Krone exchange rate could see significant movement by the end of the week depending on the outcome of the ECB's July policy decision.
Since ECB chief Mario Draghi's Sintra speech in June, markets have started to price in the beginning of the end of the ECB's ultra-loose monetary policy - pushing up bond yields and the euro.
As for the Pound, stronger-than-expected retail sales results would lead to hopes that Britain's economy will be resilient later in the year despite the pay squeeze. This continued during the U.S. session as well and this helped the EURUSD pair to push towards the 1.1580 region but the 1.16 round figure managed to hold on and this helped the dollar to recover a bit.