The Pound Euro (GBP/EUR) exchange rate slumped to a new three-week low this week, after the European Central Bank (ECB) announced a change to its inflation mandate.
Euro soars as ECB bolsters credibility by raising inflation target
The Euro spent the first half of this week’s session on the back foot, mostly in response to some lacklustre economic releases from Germany.
EUR investors were dismayed by a shock contraction in German industrial production in May as well as a sharper-than-expected deterioration in economic sentiment in the Eurozone’s largest economy.
However, the Euro was able to mount a convincing recovery in the latter half of the week, after the ECB concluded its long-awaited strategy review, with the announcement that it would be adopting a symmetric inflation target of 2%.
While the new target gives the ECB extra room to keep interest rates at record lows for longer, the ECB did not go so far as the Federal Reserve in suggesting it would allow inflation to exceed its target to compensate for past weakness, with the hawkish comparisons with the Fed acting as the main catalyst for the Euro’s rebound on Thursday.
On the other hand, the Pound got off to a strong start this week as GBP investors welcomed Boris Johnson’s announcement that nearly all remaining coronavirus restrictions in England will be lifted on 19 July.
But as the week went on, and UK coronavirus cases continued to climb at a dramatic pace, some investors began to cast doubts on the government’s reopening plans, sapping Sterling sentiment.
UK coronavirus developments in the spotlight
Boris Johnson is due to provide more details on the 19 July reopening on Monday. Will the Prime Minister have succumbed to pressure from health experts to adopt a more cautious approach to lifting restrictions, potentially weakening the Pound Euro exchange rate in the process?
Also influencing Sterling sentiment will be a couple of high-impact UK data releases, with positive inflation and unemployment figures likely to extend some support to GBP exchange rates.
Meanwhile, next week will also see the publication of the Eurozone’s finalised CPI figures for June. Will confirmation that inflation slowed to 1.9% in June put some pressure on the Euro?