Euro to Pound Sterling Exchange Rate Forecast to test 0.78's

mario draghi euro exchange rate 1

The EUR/GBP exchange rate is charging higher as markets buy all things euro following the release of worse-than-forecast employment numbers in the United States.

The pound is meanwhile hampered by a chronic lack of confidence with market attention squarley focussed on the June 23rd EU referendum.

The euro to pound sterling exchange rate bounced by 0.75% as markets hoovered up euros and dumped dollars and sterling courtesy of some worse-than-forecast payroll data out of the United States.

The headline non-farm payroll reading read at 38K - almost unbelievable really. Markets were forecasting a read of 164K.

To make matters worse the previous month’s reading was revised lower to 123K.

The headline numbers completely overshadowed all the other smaller prints, Average Hourly Earnings for example were a non-event at 0.2%.

The result is that the dollar is being sold in agressive fashion with markets content to buy euros and pounds.

The euro is however sucking up the lion's share of outflows and this is catching the pound out - the EUR/GBP rate is 0.56% higher at 0.7775 while the EUR/USD exchange rate is a whopping 1.31 pct higher at 1.1295.

"We expect sterling to remain in the defensive as the campaign on the EU referendum intensifies. A sustained break above 0.7750 would be a first indication of further deteriorating sterling sentiment. We maintain a sterling negative bias," says Piet Lammens at KBC Markets in Brussels.

Chris Turner at ING gives his forecast for the EUR/GBP post-NFP saying:

"GBP has under-performed today, which is not a surprise given what appears to be an increasingly close referendum. We would expect Cable to continue to lag the EUR/USD rally and EUR/GBP to push up to 0.7840 with outside risk to 0.7900/793."

EUR/USD is performing well too. Short EUR positioning is nowhere near as large as it was last December. "We suspect sellers may return in the 1.1500 area on the assumption that if the US really is slowing, the ECB may after all threaten fresh stimulus," says Turner.

Take this as your official call - the pound is now on the backfoot.

Draghi Halts Euro Strength

The European Central Bank's monetary policy announcement failed to stimulate any strength in the main euro pairs despite upgrades to both growth and inflation being made by the ECB.

Mario Draghi may have increased growth forecasts for 2016 from 1.4% to 1.6%, but his overall tone at the ECB press conference could be characterised as downbeat with the express purpose of ensuring the euro and Eurozone interest rates did not rally.

It is no secret the ECB wants both interest rates and exchange rates to remain as low as possible, therefore one of the big risks of the June event was that both would rise on the back of the positive forecast upgrades. 

The tone adopted by the ECB President therefore reflected underlying concerns about the outlook for the economy, especially as the package of measures introduced in March still don’t seem to have had taken effect.

“Mario Draghi battled fiercely this afternoon to defend policy measures made by the ECB in March, stating that severe deterioration of financial conditions had been avoided,” notes Alex Lydall at Foenix Partners.

Draghi was forced to put a spin on lack of wage and price growth by saying they had "not deteriorated", although this fell short of saying they were rising.

“Further claims of no wage or price deterioration will also raise eyebrows for investors as deflationary territory still appears to not be improving. The more topical notion of the Brexit was also addressed, defending the ECB as being well prepared for a UK exit, if it occurs,” says Lydall.

Draghi's tone had the desired effect as the euro exchange rate broadly weakened through the course of his policy announcement.

EUR/USD ended the meeting lower at 1.1159 and the euro ended at 0.7722 to the pound.

The Winners and Losers of the Week Gone by

Looing at FX market performance for the week past we note the New Zealand dollar was the best performing currency in G10 while the British pound was the worst performer.

Even the USD, which got battered by the employment data release, managed to eke out a weekly gain against sterling.

GBP was dragged down by a jump in volatility ahead of the EU referendum, as polls remain close and betting shops shorten odds against a ‘leave'.

The yen surged after the consumption tax increase was postponed and further fiscal easing was promised.

Strong Australian FGDP data helped the AUD a bit.