Choppy day for Sterling/Euro

Friday 6th March 2015

Choppy day for Sterling/Euro

Yesterday was a fairly volatile day for our most actively traded currency cross, with the single currency gaining around half a percent against the pound before losing ground to end the day in the mid €1.38s (at interbank).

Against the dollar, sterling gradually lost ground over the course of the day while the US currency strengthened, as investors bought the unit in favour of the floundering euro.

GBP/EUR & GBP/USD

graph

 

There were significant announcements from two of Europe’s major central banks yesterday, with an interest rate decision from the Bank of England followed by the same announcement from the European Central Bank.

There were no surprises as the UK’s central bank announced no change to policy, with interest rates staying at 0.5% and the quantitative easing programme remaining unchanged at £375bn. Interest rates in the UK have remained at this record low for 6 years, having been slashed back in March 2009.

ECB already considering further QE expansion

The ECB also decided to keep interest rates on hold at 0.05%. The announcement was widely expected, but analysts paid close attention to ECB president Mario Draghi’s speech following the interest rate decision in which he confirmed the basis of the ECB’s quantitative easing programme, first discussed back in January. He confirmed that they would begin buying bonds next week, totalling €60bn a month until September 2016.

He also mentioned later in his speech that the ECB may well extend the programme beyond September 2016. The QE package will see the ECB inject at least €1.1trilliion into the Eurozone economy in an attempt to encourage lending by the banks which should, in theory, stimulate economic activity and drive inflation back up towards the bank’s 2% target.

‘’We will on 9 March 2015 start purchasing euro-dominated public sector securities in the secondary market….we will also continue to purchase asset-backed securities and covered bonds which we started last year,’’ Draghi said.

Following the announcement we saw a fairly significant drop in EUR/USD, falling below $1.10 for the first time in 11 years and trading at levels not seen since September 2003. We may well see a further fall for the currency pair today, with the release of US non-farm payrolls data this afternoon which may well strengthen the dollar further.

EU growth forecasts improve

However, it’s not all doom and gloom for the single currency, as there were elements of positivity in Draghi’s speech in Nicosia yesterday. Growth forecasts for the currency bloc for 2015 were revised upwards from 1% to 1.5%. Draghi also said that growth in the fourth quarter of 2014 had been much stronger than expected, driven by robust growth in Germany.

“The latest economic data and, particularly, survey evidence available up to February point to some further improvements in economic activity at the beginning of this year….looking ahead, we expect the economic recovery to broaden and strengthen gradually,” Draghi said.

Today’s data

Looking ahead, we have the release of UK inflation expectations later today, which may weaken sterling as inflation in the UK continues to slow. This may also shed some light on when the Bank of England may look to raise interest rates, having now been at record lows for 6 years.

Most analysts are now expecting the Federal Reserve to be the first of the major central banks to tighten policy, with speculation that they may look to raise rates as early as June. The BoE should eventually follow suit, although expectations of a rate hike in the UK have now been pushed back to 2016 when inflation is forecast to move back towards the bank’s 2-3% target.

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If you have an imminent currency exchange requirement, contact your account manager at the Foremost Currency Group. If you don’t already have an account, please contact me on the details below or open one for free, without obligation, by following this link.

James Baxter

+44 (0)1442 892062

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