GBP/EUR: Lagarde Says Forward Guidance is “Effective”

The British pound is higher against the euro on Wednesday afternoon after data showed a recovery in the UK service sector while at the same time speeches from ECB President Lagarde and data from the Euro area weighed on the euro.

GBP/EUR was higher by 48 pips (+0.40%) at 1.1843 with a daily price range of 1.178 to 1.186 as of 1pm GMT. Having started the day below 1.18 the currency pair rallied up to 1.185 by lunchtime. The gains add to the +0.42% rise on Tuesday but the exchange rate is still down on the week after hefty losses on  Monday.

GBP to EUR – A surprise pickup in the UK’s all-important service sector has come to the aid of Sterling

The was currency on track for a second day of gains but still down on the week. The UK Markit Services PMI saw a surprise rise to 53.9 when it was expected to remain steady at the 52.9 printed in December. This adds to the faster-than expected rise in construction reported by purchasing managers on Monday.

The business surveys are all pointing to a ‘Boris bounce’ in the economy after the UK general election. If all else remained equal, the UK economy outperforming that of the Eurozone should be a recipe for GBP/EUR strength. However, it isn’t all equal and the pound is still being pressured by Brexit uncertainty.

The euro

Speakers from the European Central Bank were out in force on Wednesday, the highlight of course being new ECB President Christine Lagarde. With Europe’s central bank in the middle of a strategic review, all the ways it conducts itself are under the microscope.

Today the focus was ‘forward guidance’ and whether it should be abandoned. As a reminder ‘forward guidance’ refers to the communication from a central bank about the state of the economy and likely future course of monetary policy. Lagarde described forward guidance as an “effective automatic stabiliser” – suggesting it was here to stay as a policy tool by the ECB after the strategic review. And by way of some guidance on the environment for setting interest rates Lagarde described a lot of short-term uncertainties, which will presumably deter the ECB from raising rates anytime soon.

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