Doves remain firmly in control of the ECB governing council, which could mean downside for EUR/USD and help cushion the Pound-to-Euro rate.

Evolving views around the Euro’s prospects are bad news for those who have been holding out for a resurgence of the common currency and could help cushion the Pound-to-Euro rate against further downside during the months ahead.

“Until an end of the purchasing programme is in sight the first rate hike seems an increasingly distant prospect,” says Thu Lan Nguyen, an analyst at Commerzbank. “Bad news for EUR bulls.”

Nguyen’s Wednesday commentary comes closely on the heels of ECB policymakers Coeure, Weidmann, and Villeroy having presented a unified call for an end-date to be set for the ECB’s bond buying program.

“The central bankers would have been able to stop the purchases even when inflation was not strong enough by arguing that due to the low interest rate levels monetary policy as a whole was still sufficiently expansionary,” Nguyen says.

Interest rate hawks Coeure, Weidmann and Villeroy are in a minority on the European Central Bank governing council. There are seven policymakers, out of a total of 16, who want a clearer plan for the winding down of ECB QE.

“With the exception of a reduced monthly purchasing volume, they did not accept any signal that the purchasing programme might end imminently,” Nguyen adds.

A majority of ECB policymakers voted at their October meeting to continue buying European bonds until September 2018 “or beyond”, albeit at a reduced rate of €30 billion per month (down from €60 billion).

“This has important implications for the FX market. After all, the ECB has made it clear that interest rates will only start rising long after the end of the asset purchasing programme,” Nguyen says.

A final end-date for the ECB’s quantitative easing program is subject to signs that inflation is charting a sustainable return toward its 2% target.

ECB Governing Council member Ewald Nowotny said Friday that September 2018 could see policymakers begin setting out a more clearly defined end to the bank’s quantitative easing program.

“We change our ECB call: we now expect the ECB to extend QE once more and the first rate hike is not seen until Q4 2019. Thus, we no longer anticipate a deposit rate hike in Q1 2019,” says Johnny Bo Jakobsen, a strategist at Nordea Markets.

Friday’s comments by Nowotny, who is also one of the governing council hawks, are notable because they imply that an eventual interest rate rise in Europe may be further off than markets had previously thought.

“With the recent dovish ECB signals and signs of scarcer USD liquidity, we postpone the EUR/USD rebound in our forecast. In general, we expect the USD strength to prevail over the coming three months,” Nordea’s Jakobsen adds.

Jakobsen forecasts the Euro-to-Dollar rate will now sit at 1.20 around the end of 2018, down from the 1.25 level forecast just a few weeks ago. He also predicts the Euro-to-Pound rate will remain higher for longer as a result of ongoing concerns around Brexit.

“Short to medium-term EUR/GBP could move further to the upside as there are still substantial risks associated with the Brexit-negotiations, while further tightening from Bank of England looks remote,” Jakobsen says.

However, if Sterling can make headway against the Dollar over the coming weeks and months, then the Pound-to-Euro rate might profit from Jakobsen’s sluggish Euro-to-Dollar rate.

This is because the Pound-to-Euro rate is derived by dividing GBP/USD over the EUR/USD price. A stable or higher GBP/USD rate divided over a lower EUR/USD price would mean a higher Pound-to-Euro.

Whether Brexit talks progress better than is expected, markets place heavier bets on Bank of England interest rate moves or President Donald Trump’s tax plan turns out to be a damp squib, a stronger Pound-to-Dollar rate cannot be ruled out.

Meanwhile, the doves remain firmly in control of the ECB governing council, which could limit the degree to which EUR/USD is able to recover lost ground.

The Pound-to-Euro rate was quoted 0.36% lower at 1.1311 during morning trading Wednesday while the Euro-to-Dollar rate was 0.02% lower at 1.1597.

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