Pound/Euro at 18 month high after ECB cuts interest rates

Monday 9th June 2014
Good afternoon. Apologies for the blog being quiet over the last week or so, as have been out of the country. Much has happened in my absence however, with the European Central Bank (ECB) last week announcing a raft of measures aimed at stimulating the EU economy. Today I will cover what they did, and how it has affected the currency markets and exchange rates. 

Pound/Euro hits 18 month high after ECB cut interest rates 

In their announcement last Thursday, the ECB revealed they have cut its benchmark interest rate from 0.25% to 0.15%. They also announced negative interest rates and cheap long-term loans to banks in a bid to boost the economy and encourage banks to lend to businesses rather than hold on to money. 

The ECB is the first major central bank to introduce negative interest rates and it is a little step into the unknown. The effect for exchange rates is a weaker Euro and the GBP/EUR rate rising to 1.24 which is the highest in 18 months. 

Why has it weakened the Euro? 

It’s due to the lower return for investors. With interest rates now at 0.15%, people are more likely to invest funds in somewhere with a higher return. This means that funds are moved out of the Euro into other currencies, and the lower demand weakens the currency and makes it cheaper to buy, hence the rise in the GBP/EUR rate. 

Denmark did a similar thing a few years ago with the aim of weakening the Danish Krone, and the negative interest rate helped to stabilise the currency. For the EU there are 2 main benefits. The weaker currency helps to boost exports while making imports more expensive, which is helpful when inflation is too low. 

The move was quite widely expected, and in my most recent post  I predicted they would cut and the GBP/EUR rate would go up. Because it was widely forecast however, it was for the most part priced into exchange rates already which is why the upwards move for GBP/EUR was relatively small. 

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Pound/Euro and Pound/Dollar are both trading at very good levels. Even if you don’t need your currency for some time, you can lock in the current rates for up to 2 years with a ‘Forward Contract’. You only lodge 10% of the total to be converted, and the remainder you keep until you need your currency. In this way you can guarantee your rate and protect yourself against a downward move in the market. 

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Alastair Archbold

EU hints at rate cut, but GBP/EUR won't break €1.20

Tuesday 25th March 2014 
Good afternoon. We have seen a little volatility today with Pound/Euro rates rising from €1.1920 up to €1.20, before hitting resistance and falling back away. Pound/Dollar continues to trade around the $1.65 mark. 

In today’s post I’m going to explain what caused the swing in GBP/EUR rates. First, let's look at today's GBP/EUR chart. In it you can see rates rising to €1.20 before falling away. I will explain why in a few moments...

UK Inflation better than expected 

First let's look at UK data. In my post yesterday I outlined that one of today’s key data releases was UK inflation, mentioning that if the figure was higher than 1.6% the Pound would strengthen. 

The actual number came in at 1.7%, so slightly above forecast. This gave the Pound a little push from €1.1920 up to €1.1945 – a small gain, reflected in the small increase in the inflation rate. 

You can read a full report about the inflation numbers here on the BBC website  

EU President gives speech, hints at ECB rate cut

The main reason for the spike in rates up to €1.20 was comments by the ECB president Mario Draghi, which I also highlighted yesterday as something that may move rates. A week or so ago, his positivity about the Eurozone economy cause the Euro to strengthen and pull GBP/EUR below €1.20.

You can read his full speech here, but to outline the key comments I took from it: 

“we commit to keep our policy interest rates as low as they are currently or even lower for an extended period of time." ... “In particular, our forward guidance implies that short-term real rates, which are negative today, will become even more negative in the foreseeable future.”  

So today was different – as you can see from the above, he hinted at interest rates coming down in the EU. This weakened the Euro due to the lower return a cut in interest rates would offer investors. A weaker Euro is cheaper to buy, and so the Pound/Euro rate rose to €1.20.  

Sterling/Euro hits €1.20 before dropping back away – why was this?  

In a recent post I explained something called Support and Resistance. In it I outlined the reasons why I think rates won't go above €1.20 for some time, which has been illustrated quite clearly in today's market movements. If you haven’t read it already, it’s worth looking at if you need to buy Euros any time soon, as this may be the highest the exchange rate gets for a while.

Pound/Dollar also remains around $1.65 for the same reasons I outlined in the Support and Resistance post I've linked to above.

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Pound/Euro falls: August 2012 forecast

Wednesday 1st August 2012
Good morning. Today I'll give a quick mid-week update on what's been happening in the currency markets in the run up to tomorrows policy decisions by the Bank of England (BoE) and European Central Bank (ECB), after we saw Sterling/Euro rates take a tumble throughout trading yesterday.

Pound/Euro rate falls on positivity from EU leaders

This week we have seen some robust comments from EU leaders that the EU debt crisis will be tackled, and this has strengthened the Euro and pulled exchange rates down. So what was said?

French President Mr Hollande said they agreed that the euro should be "defended, preserved and consolidated" and added there had been "significant progress" in recent weeks. Italy's Prime Minister Mario Monti has said he sees "light at the end of the tunnel" on the eurozone debt crisis.

As well as his meeting with Mr Hollande, Mr Monti is also travelling to Finland and Spain, and he said he hoped his meetings would help "secure the euro and give a decisive boost to European growth".

Over the weekend, a joint statement from Chancellor Angela Merkel and French President Francois Hollande was thought to indicate that Germany had softened its opposition to using the ECB and European bailout funds to buy government debt.

The comments have caused the Euro to strengthen and pull GBP/EUR rates down over a point yesterday as the graph below shows.
















So what does it all mean?

These comments come amid speculation in recent days that European authorities are set to take action to lower borrowing costs for Spain and Italy. Tomorrow we have the BoE and ECB decisions on monetary policy. The ECB meeting is now expected to overshadow policy decisions by the Bank of England and the Federal Reserve after last week's pledge by ECB President Mario Draghi to do "whatever it takes" to protect the euro.

If the ECB delivers credible measures, it could boost investor appetite for taking on risk, helping sterling against the dollar, but if it disappoints markets it could lead to sharp falls in the euro and other trades perceived as higher-risk.

So we all await what will happen on Thursday. Expect volatility in GBP/EUR rates - if the markets think action taken is good news, expect Pound/Euro to fall further. If however it's just a case of them kicking the can further down the road, then I think rates will climb back up.

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Pound Euro climbs to €1.20 again - will it go higher?

Wednesday 14th March 2012
Good morning. Sterling had a very good run yesterday, gaining against both the Euro and US Dollar. The gains were in part due to better than expected Trade Balance figures, coupled with ongoing concerns over Euros that weakened the Euro significantly following comments from the Eurozone Central Bank president. The charts below show how the Pound gained throughout trading yesterday:

~Currency Movements on Tuesday 13th March 2012~










UK Trade Balance Better than expected

The UK's trade deficit was less than expected in January, thanks to strong exports of cars to the US, China and Russia, according to data released yesterday.

The deficit on seasonally adjusted trade in goods and services was £1.8bn in the first month of the year, compared with £1.2bn in December, but less than analysts had forecast. The news gave Sterling a boost against other currencies.


Euro weakens following ECB president comments

European Central Bank President Mario Draghi yesterday called on banks and governments to make the most of a lull in the sovereign debt crisis as he seeks to get the ECB back to its main job of ensuring price stability.

Policy makers “see continued signs of stabilization” in the economy and banks “should use this currently more benign environment to strengthen their resilience further, including by retaining earnings, cutting dividends and bonuses,” Draghi said in a speech in Paris today. “The financial system should serve the economy, not the other way round.”

Markets took the comments as hints the lull in the Eurozone crisis could be short lived, with some forecasters increasing the chance of an interest rate cut in the EU. Lower interest rates mean a lower return for investors, and therefore generally weakens a currency.

This weakness was clearly demonstrated yesterday, with the single currency becoming cheaper to buy and GBP/EUR rates again climbing back towards the €1.20 level. Looking at recent trends as a guide, it may not last long at this level. It has reached this level several times in the last few months, only to rapidly drop back away.

Today's Data

Today there are unemployment figures from the UK which could affect the Pound. In the EU we have various inflationary measures in the form of Consumer Price Index. There are also measures of Industrial production, reflecting the state of this sector. In the USA Import prices is the main data.

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Pound/Euro falls March 2012 forecast predictions

Friday 9th March 2012
Good morning. Why has Pound/Euro fallen? Yesterday the Pound fell against the Euro, and rose against the US Dollar. It was developments in Greece and the EU that drove rates, with renewed optimism over the EU economy strengthening the Euro and other riskier currencies such as Sterling. So, the Pound gained against many currencies, but fell against the Euro, as the charts below illustrate:

~Currency Movements on Thursday 8th March 2012~











Euro strengthens on optimism over Greece

The Euro gained strength yesterday, becoming more expensive to purchase. It was due to Greece making progress on their debt swap. Analysts said the euro may have scope for short-term gains on a positive outcome to the Greece deal.

As the market focused on events in Greece, European Central Bank President Mario Draghi said there were signs of stability in the euro zone economy, and basically stated Greece would be allowed to default if necessary. This gave renewed optimism about the EU economy, and as such the Euro gained strength, along with other riskier currencies such as Sterling. This is why Pound/Euro exchange rates have fallen March 2012.

ECB and BoE leaves interest rates on hold

As I predicted yesterday, both central banks left rates on hold, and the BoE decided not to pursue any further Quantitative Easing for the time being. It's what the market expected, and so the decisions had little effect on exchange rates.

Going forwards, I think that at some point later this year, the ECB will make a rate cut which could weaken the Euro. Also the minutes to the BoE decision in 2 weeks time, will shed more light on if and when more QE will be on the way.

Today's Data

We end the week with a host of UK data including the latest GDP estimate, Trade Balance, Industrial Production, Manufacturing Production and Producer Price Index figures. Germany also releases Trade Balance numbers and inflation data. Stateside there are unemployment data and more trade balance figures - also we have the all important non farm payrolls, which often has a big effect on GBP/USD rates.

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Crucial day for exchange rates: Euro, USD, AUD

Friday 9th December 2011
Good morning. It was a very choppy day indeed in the currency markets yesterday, with an interest rate cut in the Eurozone and negative comments by the ECB president weakening the Euro and strengthening safe haven currencies. We saw Sterling/Euro rates gain however Sterling/US Dollar rates dropped significantly, as the charts below show:

~Currency movements yesterday~











Bank of England leave rates and QE on hold

Yesterday the Bank of England's (BoE) Monetary Policy Committee (MPC) voted to keep interest rates on hold at 0.5%, and announced no change to its Quantitative Easing (QE) programme. There was little reaction in the currency markets to the rate decision given many investors had already positioned for it to be unchanged. As the decisions were as predicted, there was no real change for the Pound, however there probably will be more QE in the coming months, putting Sterling at risk.

"There will be more asset purchases at some point next year, the UK economy is definitely fragile and needs easing," said Ankita Dudani, G10 currency strategist at RBS.

QE is seen as negative for sterling because it involves flooding the market with pounds and reducing demand, thus lowering exchange rates.

European Central Bank (ECB) cut interest rates

The ECB yesterday decided to cut interest rates down to 1%. This was widely expected, and there was little effect on the markets, and in fact the Euro gained a little strength after the decision. This was not to last however, as the ECB presient Mario Draghi ruled out any substantial aid for any ailing and indebted eurozone states, and this had quite an impact on exchange rates. Mr Draghi confirmed that the decision was not made unanimously.

ECB President's comments significantly weaken the Euro, strengthen the US Dollar

There had been speculation amongst analysts that the ECB may be preparing to bail out Italy, however Mr Draghi ruled this out during the post interest rate decision press conference: "We have a treaty that says no monetary financing to governments."

The euro weakened significantly as soon as he made the comments, and fell more than a cent against the dollar, while Sterling/Euro rates rose on the news. Looking at the charts above, you can clearly see the effect of his comments around 1pm. Sterling/Euro rose as the single currency weakened, and this also drove investors to the safe haven US Dollar. When there is uncertainty, investors buy the US Dollar, and this in turn strengthens it becoming more expensive to purchase. The charts reflect this and this also explains why GBP/EUR rose while GBP/USD fell.

EU summit ends today

The moves from the ECB yesterday come ahead of a "do-or-die" Brussels summit of European Union heads to hammer out a deal on how to tackle the eurozone debt crisis, including a potential new treaty. The 2 day EU summit ending is expected to agree tough new rules and automatic fines to ensure that eurozone governments cut their borrowing to below 3% of their GDP.

There is a very good and detailed article here on the BBC website that explains the ins and outs of the summit.

So what effect will the EU summit have on exchange rates?

The short answer is nobody knows. If the summit agrees on measures that the markets think will put an end to speculation on the future of the Euro, then we could see the Euro strengthen and GBP/EUR rates falling. If however there is no consensus reached, this could leave the markets wondering what will happen with countries like Greece and Italy.

If Greece were to default and exit the eurozone the consequences could be dire; a run on Greek banks, contagion spreading to other eurozone banks and Greeks facing even worse hardship than now, with the cost of imports rocketing. The priority is to reassure investors enough to halt the rise in eurozone bond yields. The leaders believe they can do that, so long as heavily indebted countries like Greece stick with deep cuts in spending and other austerity measures.

With regards to exchange rates, tomorrows developments will likely have an effect one way or the other. Put simply, if problems are solved, GBP/EUR could fall and GBP/USD could rise. If there is continued uncertainty, GBP/EUR could remain supported and GBP/USD could fall further.

What you should do to ensure you get the best exchange rates

You've already taken the first step by finding my blog and doing a little research on what may happen with exchange rates. I have worked in the Foreign Exchange markets for 10 years, and have a detailed knowledge of the currency markets. I also work for one of the UK's leading FSA registered foreign exchange brokerages, and the rates we can achieve for our clients are up to 5% better than banks and other financial institutions.

So, take the second step to making the most of your currency:

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Effect of Quantitative Easing on Exchange Rates

Thursday 6th October 2011
Good morning. Sterling exchange rates rose a little yesterday morning after a UK services sector survey data was better than expected. Gains were short lived however, as the Pound remains under pressure on growing expectations the Bank of England will soon announce further quantitative easing to boost the economy, this could happen today. At 08:30am this morning rates are as follows:

• GBP/EUR 1.1578
• GBP/USD 1.5429
• GBP/AUD 1.5937
• GBP/NZD 2.0102
• GBP/CHF 1.4298
• GBP/CAD 1.6065
• GBP/ZAR 12.243
• GBP/JPY 118.30
• GBP/DKK 8.6177
• GBP/NOK 9.0613
• EUR/USD 1.3319

Could the Bank of England announce Quantitative Easing today?

Data yesterday showed UK economic growth is almost non existent. The revised GDP figures showed the economy is pretty much at a standstill, and has been now for 6 months. This increases the case for further Quantitative Easing, which many analysts believe will happen if not today, then in November.

Pumping money into the economy would help keep interest rates low and boost the economy, however it would also flood the market with Sterling and this could push exchange rates lower. Most analysts believe they will have to pursue more QE, and this could be announced today. There are some that believe that the BoE may wait until November, by which time there will have been another round of economic data to help them in their decision.

The fact remains however that it really is a question of when, not if, they announce further QE. It is this that has been keeping Sterling on the back foot, and the reason many in the markets believe Sterling is at risk of a correction to the downside.

EU debt crisis; what next?

The debt crisis is now turning into a banking crisis, with so many UK and EU banks exposed to Greek debt, this has been causing problems in the global economy. Italy has had it's credit rating downgraded, the IMF say they may step in to assist, leaders have delayed a decision to give more money to Greece - all in all there is a considerable lack of direction in the Eurozone.

These problems have weakened the Euro, and this is the reason GBP/EUR rates are not down in the €1.10 or below territory. Today the ECB will announce their decision on interest rates, but it's likely there will be no change.

What is important, is the press conference after the decision. This is where the president of the ECB gives his thoughts on the economy. Last month his comments caused significant changes in GBP/EUR so we will be watching closely today to see what impact his comments may have.

What you should do if you need to buy or sell currency

With markets extremely volatile for all the reasons above, exchange rates are very susceptible to any changes in economic figures. With so much happening at the moment, exchange rates could move either way by a significant amount. Rather than just hope rates move your way, there are various strategies you can employ to ensure you don't lose out.

Stop Loss and Limit orders allow you to place upper and lower limits in the market, so should exchange rates move up or down, your currency is bought at a pre-agreed level. In this way you can still take advantage of any gains in the rate, but not lose out should rates fall away.

You could also look at Forward contracts, where you can fix the current rate for up to 2 years, and only lodge 10% of the total now, allowing you to budget effectively for any purchase.

To discuss these types of contract, fill in the enquiry form now and send us a free enquiry. We can then discuss your particular requirements and put a strategy in place so you can take control over your currency requirement. Take control of your currency exchange, and don't let the markets control you!

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Sterling falls on rumour of more QE

Thursday 8th September 2011
Good morning. Sterling has fallen to an 8 week low this morning against a basket of currencies, on speculation the Bank of England (BoE) may have to pursue more Quantitative Easing (QE) to try to stimulate growth in the economy. We have interest rate decision from the BoE today, and if they do indeed announce QE then Sterling could drop further. At 08:30am this morning rates are as follows:

• GBP/EUR 1.1326
• GBP/USD 1.5934
• GBP/AUD 1.5040
• GBP/NZD 1.9138
• GBP/CHF 1.3727
• GBP/CAD 1.5705
• GBP/ZAR 11.372
• GBP/JPY 123.22
• GBP/DKK 8.4343
• GBP/NOK 8.5712
• EUR/USD 1.4063

Sterling falls on rumour of further Quantitative Easing

Due to continuing poor data showing growth is slow in the UK, many analysts think that the BoE will have no choice other than to pump more money into the economy through Quantitative Easing. A Reuters poll on their website today shows economists expect there is a 35% chance the BoE will resort to another bout of asset purchases to support the flagging economy.

However, London traders said some in the market were positioning for the possibility the BoE may announce more stimulus on Thursday, given persistent signs of a slowing economy in the past month. More quantitative easing would be negative for the pound as it would flood the market with the currency, reducing demand. If they do announce it today at 12:00pm then expect exchange rates to drop.

Interest Rate decisions today

Both the UK and EU announce interest rates decisions today at 12:00pm and 12:45pm respectively. We expect both zones to leave rates on hold at 0.5% (BoE) and 1.5% (ECB). As mentioned above however, we will watch for any mention of QE that could hurt the pound.

In the EU, while we expect no change in rates, they give a press conference at 13:30pm and often the comments made can significantly influence the value of the Euro.

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Interest Rates and effect on Exchange Rates

Thursday 4th August 2011
Good morning. Services sector data yesterday gave Sterling a boost against the US Dollar and Euro, but gains were limited as concerns remain about the fragility of the UK economic recovery, particularly after data earlier this week showed manufacturing activity contracting. Today we have the BoE and ECB interest rate decisions. At 08:30am this morning rates are as follows:

• GBP/EUR 1.1450
• GBP/USD 1.6361
• GBP/AUD 1.5330
• GBP/NZD 1.9196
• GBP/CAD 1.5797
• GBP/ZAR 11.070
• GBP/JPY 130.31
• GBP/DKK 8.5289
• GBP/NOK 8.7929
• EUR/USD 1.4285

Swiss Cut Interest Rates

Yesterday the Swiss National Bank unexpectedly cut interest rates to stem a sharp appreciation in its currency, causing several currencies such as the Euro to spike higher. With the problems in the US, the Swiss France is a safe-haven currency and had become very strong, so they had to intervene. This caused GBP/CHF rates to rise from 1.24 to 1.2730.

UK Interest Rates today

Generally disappointing UK data has added to the view that UK interest rates will remain at a record low for a prolonged period, while some have suggested more quantitative easing (QE) may be needed to revive sluggish growth rates. Today at lunchtime the BoE will announce their decision, but it's widely expected rates will again be left on hold. If however they announce any further QE, we could see the Pound fall. This is unlikely however.

Investors have steadily priced out the chances of a rate hike and are not expecting an increase in 2012, whereas late last month they expected a rate rise in November 2012. This is keeping Sterling weak compared to other zones with higher rates.

EU Interest Rates

The ECB also announce their decision, and we expect rates to be left on hold. They have already raised rates twite this year, and there may be further hikes which may strengthen the Euro slightly, making it more expensive to purchase.

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