Market Analysis – EURGBP
The Euro is once again increasing against the British Pound as it was yesterday during the morning’s Asian and European sessions. The asset has formed two bullish candlesticks and has started the week strong. The asset started the day strong yesterday after the market gap after the weekend lowered the exchange rate. The asset continued to rise until retracing halfway through the European session. As previously mentioned, we again have a bullish candlestick today so far, but traders must keep in mind that the asset has not yet passed yesterday’s price high which is still 11 pips away. The market will be looking to see if the Euro will be able to maintain its bullish momentum as the Euro has generally been struggling against the Pound since late April this year.
The sentiment has grown for the Euro as traders are curious to see how the European Central Bank is likely to react to the new levels of inflation. The Eurozone has gone from minus figures and deflation in 2020, to a strong steady increase over the last four months to an inflation of 2%, which is 0.4% higher than the previous month. The rate is the highest reading since October of 2018 with the cost of energy expected to rise 13.1% compared to 10.4% in April this year, followed by services which rose 1.1% versus a predicted 0.9%, non-energy industrial goods had a rate of 0.7%; food, alcohol, as well as tobacco rose 0.6% as it also did the month before.
According to IHS Markit’s Vice President, Mr. Ken Wattret, the rise in inflation over the past months has been the fastest in the history of records for the Eurozone’s inflation, which surged from -0.3% in December 2020, to 0.9%t in both January and February 2021, before rising further to reach 1.6% in April 2021 and then 2%. Wattret has pointed to several key factors driving this strong upward trend, including bullish crude-oil prices, the end of value-added tax reductions in Germany, sales periods being moved or reduced due to the COVID-19 pandemic as well as tourism and general holiday season where citizens have mainly remained within the EU, again further supporting the local economy.
However, the question is whether the European Central Bank will be willing to amend their Monetary Policy, or if they will keep to the stance of a loose policy as have other Central Banks such as the Federal Reserve. According to Bloomberg, ECB officials and the monetary committee are unlikely to amend the economic stimulus package or interest rates. Dovish policy makers such as Mr. Fabio Panetta claims there’s no reason to slow the pandemic bond-buying pace of around 20 billion euros a week as the region has only just come out of recession and unemployment remains 1% higher than 2019. More historically hawkish members such as Bundesbank President Jens Weidmann have stayed mostly quiet on the topic. However, we will have to see if this position changes on Thursday where the Central Bank has a press conference and the Monetary Policy Statement scheduled.
Inflation levels seem to be the main talking point around the globe as the high levels of inflation can damage economic stability and conditions if they remain high while at the same time wages generally remain frozen and unemployment remains high. Though at the same time, higher interest rates could do equal damage as the economy and employment sector continues its recovery. The inflation level in the UK is not over-split yet and still remains lower than their neighbours. The UK currently has an inflation rate of 1.5%, which is 0.5% lower than the Eurozone, though the unemployment rate in the UK is almost half of that in Europe.
Looking at each currency individually we can see that the Euro Currency Index, which is measured against four currencies, is indicating a slight decline in today’s session. The Pound does not have a registered index, but we can see the currency is declining against most of its main competitors such as the US and Canadian Dollar, Yen and Swiss Franc.