Euro Forecast: Why is EUR Strengthening?

EUR to GBP Faces a Pivotal Week with Inflation and ECB

Euro exchange rates look set in their trend after yesterday’s meeting from the European Central Bank decided to keep policy unchanged. After a long string of added stimulus provided by the European Central Bank ever since the start of the outbreak of the virus it seems policy makers have a renewed sense of confidence in conditions across the European bloc, and therefore the euro forecast. Clearly the Pandemic Emergency Purchase Program, amounting to a stimulus package of around €1.35 trillion euros has been put to good enough use to spark tangible change across multiple indicators for the ECB to be confident enough to halt further injections. The change in stance could help the euro further consolidate it’s value on the international stage. Added funding from central banks has historically weakened the value of the currency in question with the added quantity of money in circulation outweighing the demand. As other major central banks around the globe brace themselves for further interventions to support their respective economies, there is a chance investors will see this week’s show of confidence from the ECB as a reason to get behind the single currency in the weeks and months ahead.

There were a number of factors brought up by the ECB that back this theory up. Indeed, although well below levels seen before the pandemic took hold of European markets, president of the ECB Christine Lagarde pointed towards a gradual recovery of economic activity across the bloc as a reason for optimism. Although uneven, it seems both short term and long term consumer spending and business confidence indicators have swiftly recovered from the record lows we saw in April, towards the potential start of a the v-shaped recovery investors have been waiting for.

Incidentally, JP Morgan have upgraded their projections for the single currency, with the euro projected to potential break past 1.15 against the US dollar in 2020 and potentially hitting 1.20 in 2021. Shifts on EUR USD pairing could certainly have big repercussions on EUR GBP pairing too. Particularly with Brexit talks weighing on the pound, will the single currency be able to capitalise on sterling’s vulnerabilities with this added surge in demand?

What Might be Stopping the Euro From Getting Stronger?

Christine Lagarde did highlight to areas of concern that might be anchoring the Euro in current ranges however. Firstly, inflation levels have long been an area of concern for the European Central Bank, even before the added stimulus pumped into the bloc to keep the area’s head above water during the spread of the pandemic. The ECB suggested yesterday that pricing levels may struggle to accelerate, particular with GDP levels across the block understandably looking set to stall and the sharp decline in energy prices this year putting pressure on baseline inflation levels. This could be a major stumbling block that could halt the ECB from adjusting it’s monetary policy in the long run.

Furthermore, the European jobs market is also surfacing question marks which could be weighing on the single currency’s value on the international stage. Because the recovery in Europe has been uneven across the EU’s members, the outlook has remain uncertain which has prevented business owners to confidently continue employing a portion of their staff. This is turn is having big consequences on the consumer spending and so growth forecasts remain uninspiring.

It will be interesting to see if that uneven progression comes up in today’s EU leaders Special summit. The meeting was initially pulled together to discuss the resolution of Greek’s debt. As one of the European country’s commended for their ability in controlling the spread of the virus, perhaps other members will be drawn into the spotlight on this occasion at which point another layer of volatility on euro exchange rates could be expected. If you have a pending euro requirement and would like to plan your transfer around this event, feel free to get in touch using the form below.

Clearly, the euro’s gains this week might have been further aided by the UK’s posting of nearly 650,000 added to unemployment levels. It will be interesting to see how the markets react once the leading European nations post their respective figures. Furthermore, today’s consumer spending releases for the month of May and June could prove pivotal for Euro exchange rates as the week comes to a close. As mentioned early the ECB’s confident stance this week was based on a gradual pick up in market indicators. Should this afternoon show lower levels than expected we could see this week’s gains come into question.