Pound dips below €1.20 / $1.60 – Interest Rates today

Wednesday 4th April 2012
Good morning. As I have been warning in recent weeks, the levels of €1.20 on the Euro and $1.60 on the US Dollar may not last forever, and indeed yesterday so the Pound fall slightly against both currencies, however upbeat manufacturing and construction data gave some support which limited the drops, as the better than expected data tempered concerns over a lack of growth in Britain’s economy.

ECB Interest Rate decision; how could it affect GBP/EUR exchange rates?

Later today we will see the latest EU Central bank decision on whether they will make any changes to the base rate of interest. My forecast is that no monetary policy changes are expected from the European Central bank today. The same is true of the majority of the experts, with the general consensus that it is highly unlikely for the ECB to change interest rates.

45 minutes after the decision however, we have a press conference with ECB president Mario Draghi. In this he gives his opinions on the current state of the economy, and we often see his comments interpreted as an indication of future interest rate moves. So while I don’t expect a rate change in the EU today, I will be closely watching the press conference for any hints of future monetary policy.

Some analysts are saying a hawkish message from the bank wouldn’t be a surprise, as they need to get back to concentrating on quelling inflation instead of helping Europe’s economy and financial system out of crisis may give the euro a brief boost. This could give the Euro strength and push exchange rates further lower. However some investors were still looking to sell the euro as concerns grew about a fragile outlook for the euro zone and high debt levels in Spain.

So, yet again there are views to both sides and so it’s impossible to predict what effect today’s ECB decision will have on rates.

Will the Bank of England announce more Quantitative Easing today?

I don’t think that the BoE will decide to increase its bond purchase program, despite the fact that two of the MPC members called for it at the last meeting. The minutes from the BoE MPC March meeting revealed that David Miles and Adam Posen voted in favor of extending the bond purchase program. Unless there is a very sudden deterioration in the UK economy, I think the central bank will hold off on further stimulus for now.

“Sterling looks like an okay bet for now as most of the bad news for the UK has been priced in,” said Geoffrey Yu, currency strategist at UBS. “But I don’t think investors are actively (favouring) sterling and in the next few months we think it is likely to head lower.”

Sluggish growth in the midst of a strict fiscal austerity programme has already forced the Bank of England into pumping 325 billion pounds of stimulus in the shape of quantitative easing into the economy. Other data from the service sector due this morning will be closely scrutinised for UK growth prospects and could have more of a lasting impact on the pound.

Today’s Data

Staring in Australia again today, we see some Trade Balance figures that could affect GBP/AUD rates. In the UK there are PMI figures released which as mentioned above could have an impact on the Pound. Of more importance will be the latest announcement on any Quantitative Easing. The EU also has an interest rate decision today, followed by a press conference. This often causes more volatility than the decision itself, so we will be watching it closely.

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