German Court Questions ECB Bond Buying, EUR GBP Rate at 0.87

Euro Exchange Rates: All Eyes on ECB Monetary Policy Decision

The EUR GBP interbank exchange rate slid yesterday against a number of major currency pairs, as tensions between German lawmakers and the European Central Bank (ECB) were exposed and some risk returned to currency markets. There have been ongoing talks, and issues between different regions within the Eurozone regarding financial stimulus packages and the spreading of funding these packages across the economic area.

Yesterday these tensions became official as Germany’s highest court gave the European Central Bank 3-months to justify purchases under its bond buying scheme, or risk losing the Bundesbank from contributing towards the stimulus package which is aimed at helping the economic area recover from slowdown caused by the COVID-19 lockdown. These comments from German lawmakers came despite a 2018 ruling that the ECB bond buying scheme is in line with EU law.

These tensions pushed the euro to a 1-week low against the US dollar and also helped the pound recover some recently lost gains against the euro, helping the currency break back above 1.14 and climb back up towards the 1.15 handle. Although the European Central Bank is expected to be able to justify the reasons for its bond buying scheme, the uncertainties and tensions on display are just the latest showing of issues in Europe regarding the spreading of debt, and could continue to impact the euro’s value negatively. Unfortunately it’s been the debt laden countries within the EU that have been heavily impacted by the COVID-19 virus as opposed to many of the northern European countries which already cover more than their share in covering the area’s debt.

On a more positive note for the euro moving forward, some of the most badly affected regions of Europe from the Coronavirus have begun to slowly lift lockdown rules which will help to rebuild the economies. Whilst there are concerns of a second wave that could be more deadly than the first, the return to normality, at least some sense of normality could improve economic output and sentiment within the region which is a positive for the area.

Bank of England Policy Update at 07:00 Tomorrow

For those of our readers following the EUR GBP pair it’s worth being aware that tomorrow morning the Bank of England has taken the unusual decision to hold a BoE policy update at 07:00, before stock markets have opened. An early update usually involves key changes and takes place outside of market hours so there isn’t a knee jerk reaction, but many analysts expect there to be no changes as the BoE may be weary of upsetting the calmer markets compared to March where there was considerable volatility. The outcome remains to be seen though so it’s definitely worth following in case there are some key updates that could move the markets.

Back in March the currency markets were so volatile that the pound to euro exchange rate hit both the highest and the lowest levels seen since the Brexit vote which took place almost 4-years ago. Since then we’ve seen the pair consolidate and they’ve continued to trade between 1.1350 to 1.1500 for some time. It’s for this reason that some market analysts predict that the BoE won’t want to ‘rock the boat’ and make significant amendments to monetary policy but it’s still worth monitoring the markets just in case.

Today Construction PMI was released, and it came out considerably below market expectations. The figures covers sentiment within the sector of the UK and any figure below 50 shows a contraction. The expectation was for 22 but the figure released was 8.2 which is a worrying sign but there hasn’t been too much market movement and EUR GBP has been relatively unaffected.

Apart from economic data releases and monetary policy updates, Brexit talks are also a topic that could impact both the Euro and Sterling exchange rates. It’s taken a backseat recently due to the global slowdown and the lockdown but with both sides expecting progress by June the negotiators from both sides have their work cut out and this could impact exchange rates.

From the Eurozone side, ECB President Christine Lagarde will be speaking tomorrow afternoon, and with all that’s going in in Europe I expect the markets to follow her comments closely in case she comments on the tensions between German lawmakers and the ECB’s monetary policy.

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