ECB President Mario Draghi is maintaining pressure on the Eurozone's currency ensuring the British pound retains the advantage.
Following comments by Draghi on Thursday the GBP spiked to break through the 1.42 marker against the euro as the gap between the 10-year UK gilt yield and its German counterpart reached its widest since early May.
The yield advantage held by the UK boosted demand for the pound which has ultimately persisted into Friday and sets us up for a strong close into the weekend.
Driving the move in yield diffirentials was ECB President Draghi who told European lawmakers that inflation dynamics had weakened in the Eurozone thanks to lower oil prices and the delayed impact from a firmer euro which is keeping import prices lower.
No doubt the comments on inflation will keep alive the prospect of more policy accommodation next month.
"The euro is being dragged down by Draghi's comments. It doesn't appear he is holding back. The recent mixed data from the UK means that the BoE is still on track to raise rates sometime next year. So, the August levels in euro/sterling are being targeted," a trader in London told Reuters.
It is this promise of rate cuts in the Eurozone, and interest rate rises in the the UK in 2016 that could well see the GBP to EUR conversion hit 1.49.
However, ING analysts argue that this will be as good as it gets as they foresee significant downside pressure coming from the UK’s referendum on staying within the Eurozone.
There were two important reports from Reuters this week regarding the ECB which, if true, will ensure the euro is likely to remain under pressure:
1) on Monday it was revealed that there was a preference from four ECB Governing Council members to cut the deposit rate sharply and
2) on Wednesday it was reported that the ECB is investigating whether it should add municipal and regional bonds in its asset purchase programme.
If you are seeking higher exchange rates you should not be complacent and lock-in current levels for part of their payment while leaving open the prospect of further higher levels to be traded should they be reached in coming days. Find out how.
However, those looking for ever-higher rates should be aware that the debate over a December interest rate rise is not done and it may never happen.
Comments from ECB members Liikanen, Weidmann and Hansson suggests that a number of Eurozone policymakers do not feel the urgency to act. According to Hansson, there's no need to cut policy rates now.
His comments follow yesterday's similarly less dovish views from Liikanen and Weidmann.
There is obviously a debate happening within the ECB, should those who are against further interest rate cuts win the day then you can bet your bottom dollar (or pound!) that the euro exchange rate complex will recover.
Outlook: Inflation Data Ahead
Sterling recorded a solid, near 2-cent gain on the week against the dollar, helped by the U.K. currency’s outperformance against the euro.
"Despite its resilient week, Britain’s steady interest rate outlook for as far as the eye can see should limit gains for the pound and leave it vulnerable should news next week on U.K. inflation (Tuesday) and consumer spending (Thursday) meet markets’ subdued expectations," says analayst Joe Manimbo at Western Union in reference to upcoming challenges for the UK unit.