GBP/CHF Pushes 1.50 After ECB Announcement

Franc Weakens with Euro After Draghi Speech

The Swiss franc has weakened somewhat over the last few days as comments from the president of the European Central Bank, Mario Draghi, weakened the single currency, dragging the franc down with it. GBP/CHF has subsequently risen to just under 1.50, losing around a percent following the announcement. The graph below shows GBP/CHF movement over the last week.

GBP/CHF 1 Week

At a meeting of the European Central Bank’s general council in Brussells on Friday, Mario Draghi expressed his concerns over the fragile state of the economic recovery in Europe, with the problems in Ukraine and slowing inflation in the currency bloc threatening the stability of the eurozone. He hinted at the possibility of a shift in monetary policy next month, saying the ECB would be ‘comfortable’ cutting interst rates further or opting for additional monetary stimulus.

“I would say that the governing council is comfortable with acting next time but before we want to see the staff projections that will come out in early June,” Draghi told a press conference.

“There is consensus about being dissatisfied with the projected path of inflation. So there is a consensus with not being resigned to expecting this,” he said. “We have a consensus about action, but after seeing the staff projections in early June.”

Although no change to current policy was announced, market players saw Draghi’s comments as justification to sell the euro. Historically, interst rate cuts tend to weaken a currency as the yield on assets denominated in that currency decreases, therefore decreasing the demand for the currency and lowering its price. Both GBP/EUR and GBP/CHF rose by half a percent immediately following the announcement and are still rising.

Draghi remains concerned about the level of inflation as it is slowing fairly significantly. Historically, central banks would use monetary policy to tackle inflation, ie. through lowering interest rates. Low interest rates would tend to encourage consumer spending as people would be less inclined to save. Increased consumer spending would naturally push prices up. Central banks are comfortable with rates of inflation between 2-3% but anlaysts are expecting a level closer to 0% when May’s figures are analaysed. As interest rates are already at historic lows, Draghi has little room to manouvre. There has been speculation that we may see negative deposit rates in the eurozone, whereby the banks would actually have to pay the ECB to hold their funds. Theoretically, this should encourage banks to lend more, helping push inflation back up to a comfortable level.

On the sterling side of the cross, the pound is still performing well. The UK currency has gained significantly across the board over the course of 2014. There is slight concern, however, that the Bank of England may soon start attempting to talk the pound down as the strength of the currency may start to negatively effect export levels. A strong pound makes UK goods more expensive to overseas customers. As the eurozone is the UK’s main trading partner, the stronger the pound gets against the euro, the more of a negative impact this will have on trade with the eurozone. On Thursday Mark Carney is due to give a speech following the inflation report. It will be interesting to hear the Bank of England’s thoughts on the strengthening currency and how they feel this may effect the UK’s economic recovery.

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