Pound V euro: Spring Statement uncertainty leaves GBP exchange rate tight
THE pound has been trading in a narrow range against the euro this morning. It has previously declined from Monday’s high of €1.129 to today’s GBP/EUR exchange rate of €1.126.
Hammond delivers the OBR's forecast in Spring Statement 2018
As with Monday, today’s limited pound movement is because of uncertainty about the contents of today’s Spring Statement.
Chancellor Philip Hammond will be presenting a summary of UK economic performance over the previous months, as well as forecasting future changes to economic growth.
An adjustment to spending is not expected to be on the agenda, given that this is only a ‘statement’ compared to the Autumn Budget.
Aberdeen Standard Chief Economist Lucy O’Carroll has said: “[Mr] Hammond has made it very clear that austerity is not going to end.
“That’s a political choice at this stage in the economic cycle rather than an economic imperative.
“He seems very focused on maintaining the purse string tightly and not increasing spending substantially until the next spending round, potentially in 2020.”
Such a cautious strategy could devalue the pound, although if Mr Hammond counters with a positive assessment of UK’s prospects then the GBP/EUR exchange rate could rise.
Although the euro to pound exchange rate has risen marginally today, the euro has still been constrained by pessimism about future European Central Bank (ECB) policy.
It is absolutely crucial that we meet our price stability objective and not accept a level below that
The ECB has kept interest rates at 0 per cent since 2016 and enacted a substantial asset-purchasing program to stimulate Eurozone economic growth.
ECB President Mario Draghi recently suggested that monetary policy controls could be lifted in the future, but this has been challenged by another ECB official.
Jan Smets, member of the ECB’s governing council, has stated that there is a long wait ahead before tighter monetary policy.
She said: “It will take somewhat more time to get to the [2 per cent inflation target] than we thought earlier.
“The level of potential output may have become higher due to structural reforms and slack may be bigger.
“It may take more than we thought and inflation pressures could take more time to build.
“It is absolutely crucial that we meet our price stability objective and not accept a level below that; the objective is what it is and we are not there yet."
The Bank of England explains the exchange rate
The Spring Statement will be the primary source of GBP movement today.
If Mr Hammond has mainly good news about UK economic growth then the pound could rise sharply.
The euro could decline against the pound when today’s Eurozone data comes out – the main stats will be Irish GDP growth readings for Q4 2017.
Growth levels are tipped to decline for the year-on-year and quarter-on-quarter readings, which could lead to a euro to pound exchange rate decline.