Will Draghi Help the Euro Rally Continue Against the Pound?

23.08.17
3 minute read
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It seems very little can stop the current decline of the pound. Sterling continued to lose value against the euro in the previous session, despite better than expected UK data and lower than anticipated Eurozone economic sentiment scores. By the end of the Tuesday the pound was struggling to remain above €1.09, having started the week 0.4% higher.

Investors were not particularly impressed by news that UK public finances hit a surplus for the first time in July since 2002. Analysts had been expecting a deficit in public finances to the tune of £1 billion last month. Instead figures showed that the UK government received £0.76 billion more than it spent. The surplus is principally down to an increase in the number of self-assessment tax receipts, indicating a solid base to the economy; however, SA tax receipts are expected to slow towards the end of the year and government spending is set to rise as the government continues to tackle the fallout from Brexit.

Usually stronger than anticipated data boosts the currency, but pound traders see little reason to buy into sterling as Brexit fears continue to hang over the currency.

Positional papers on Brexit are failing to boost sentiment for the British currency. So far the government has failed to soften its approach in most key papers. However, the paper to be published, today regarding its stance on the EU court is expected to be softer, accepting that EU judges could play a part in settling disputes. This may offer some support to the pound. Although sentiment towards sterling in general is set to remain weak until the two sides appear closer to settling major details of the divorce bill.

Sentiment for the euro depends on ECB President Draghi

The euro has been weakening against all its major peers, except the pound. The common currency has rallied relentlessly over the last 3 months. However, cracks are starting to appear.

Data from Germany showed that sentiment in the powerhouse of Europe fell by more than analysts forecast. This reflects a high degree of nervousness over the future path of growth in Germany, which weighed on sentiment for the euro.

Why does poor economic data drag on a country’s currency?
Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.

Today euro investors will focus on a key speech from ECB President Draghi. Given the high value of the euro, investors will want to hear a shift in tone from Draghi towards a more hawkish stance. Should Draghi fail to provide the market with hope that monetary policy could be tightened soon, then the euro could sell off sharply

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