Pound drops sharply against the Euro before slight recovery
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For the past six days, the pound has traded against the euro in a tight trading range, oscillating between €1.1620 and €1.1680 to the pound. This is circa four percent higher year-to-date, though the currency pair has exhibited low volatility in 2021 – but that could yet change.
George Vessey, Currency Strategist at Western Union Business Solutions, said: “After another tepid day of trading on Monday, GBP/EUR continues to float about without any meaningful direction, but key risk events loom this month.”
Mr Vessey said, coupled with the upcoming German elections, the key events to watch are the meetings of central banks, along with the specific meeting of the European Central Bank (ECB).
“Volatility has the potential to ramp up in September”, said Mr Vessey, particularly if central banks start to taper monetary support.
Below is a look at what to watch for and how the coming weeks could play out.
Pound to euro exchange rate: What to watch for in September (Image: GETTY)
Meeting of the ECB
The governing council of the European Central Bank is meeting on Thursday, September 9, as it implements its new monetary policy announced in July as part of a strategic revamp.
The bank must now set out how its new framework will be implemented, particularly when it comes to guidance on its asset-buying programmes that are intended to stimulate the economy by keeping bond yields low.
The outcome of this meeting will have huge repercussions.
A hawkish ECB could see the pound-euro exchange rate dragged to the lower end of its 2021 trading range of about €1.1850 and around €1.1450.
Pound to euro exchange rate: The ECB is meeting on Thursday, September 9 (Image: GETTY)
Mr Vessey told Express.co.uk: “ECB officials have been mixed in their views about tapering monetary policy, and although no action is expected at its meeting on Thursday, a decision to slow down the pace of bond buying could transpire.
“Markets might interpret this as slightly hawkish, which could benefit the euro.”
Bond yields have already risen in response to some hawkish ECB comments which followed a recent inflation print at decade highs, allowing EUR/USD to reach fresh three-month highs recently and kept GBP/EUR trapped between €1.16 and €1.17.
“A hawkish ECB this week could see higher European bond yields and spreads, helping to support further euro strength and weighing on GBP/EUR”, Mr Vessey said.
Pound to euro exchange rate: The latest charts (Image: Pound Sterling Live)
Other central bank meetings – BoE, Fed, BOJ
Aside from the specific meeting of the ECB, Mr Vessey said general meetings of the Bank of England (BoE), US Federal Reserve (Fed), and the Bank of Japan (BOJ), should be closely observed.
Mr Vessey said: “These central bank meetings are risk events for currency markets as any change to monetary policy, particularly the dialling back of stimulus, could ramp up volatility throughout financial markets, which has recently been languishing, especially for GBP/EUR.”
He explained the reason so much focus is on central banks is, if we do see a tapering of bond purchases, the market might interpret this as bullish for that currency and the prospect of interest rate rises will also increase – leading to even greater currency appreciation.
However, tightening policy in this way is also reducing liquidity from markets and investors may interpret this negatively.
Pound to euro exchange rate: Experts are warning of imminent risk events coming this month (Image: GETTY)
This, in turn, could trigger a period of risk aversion whereby equity indices fall and risk-correlated currencies, like the pound, weaken.
Mr Vessey added, with concerns about the spread of new Covid variants on the global growth outlook and many western central banks suggesting labour market and wage cost trends are too weak for inflation to stay above targets, we’ve seen central banks reluctant to scale back monetary stimulus too soon.
He said: “With Eurozone inflation at decade highs and the EU’s vaccination campaign overtaking the US, there is a possibility the ECB will lean on the hawkish side this Thursday – potentially announcing a slowdown in bond purchases as well as publishing higher inflation and growth outlooks.
“This will likely support the euro and thus present a downside risk for the pound-euro exchange rate.”