Euro Rallies Against Pound Afer Draghi Shows No Concern Over Euro

08.09.17
3 minute read
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Draghi’s comments at the press conference following the European Central Bank monetary policy meeting on Thursday, sent the euro shooting higher. The rapidly strengthening euro pushed the pound euro exchange rate crashing through €1.09 to a day’s low of €1.0867.

The pound had been looking quite resilient over the past few sessions. Even mixed data and lack of progress in Brexit negotiations hadn’t been able to knock sterling off its course. Aiding the pound further, yesterday’s better than expected house price data gave investors reason to buy into sterling. If house prices are increasing, it means that consumers are confident enough to spend and / or take on debt. This is a good sign for the UK economy which is otherwise struggling in the face of Brexit. These numbers resulted in the pound moving higher in the earlier part of Thursday.

Why does strong economic data boost a country’s currency?
Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.

Draghi confirms tapering talk has finally started

However, the rally was short lived as investors quickly turned their attention to the ECB meeting, which dominated price action in the pound euro exchange rate. Investors will now look to the Bank of England’s consumer inflation report and then industrial production and manufacturing figures. Signs that inflation is set to move higher or if the manufacturing sector is expanding, could boost the demand for the pound once again.

Meanwhile the mood towards the euro improved on Thursday as investors digested comments by ECB President Mario Draghi. The ECB raised its growth outlook in the region for 2017 from 1.9% to 2.2%, however it revised downwards its inflation forecast for next year to just 1.2%. Draghi expressed confidence in the eurozone’s recovery, believing that it will eventually work through the financial system and push inflation higher.

Draghi also revealed that the ECB had engaged in preliminary talks surrounding the tapering of the current bond buying programme. This, along with the fact that Draghi didn’t focus on talking about the negatives of a strong euro, meant that euro traders were left content. As a result, the euro enjoyed a broad based rally.

With little in the way of influential economic data for the eurozone tomorrow or indeed next week, demand for the euro may cool slightly.

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