Thursday 3rd April 2014
Pound/Euro rates had fallen towards €1.20 this morning ahead of the ECB press conference, caused by slightly poor UK PMI numbers, and impressive EU Retail Sales.
The dip didn’t last long through, and the European Central Bank (ECB) president Mario Draghi has now finished his press conference. Despite some volatility in GBP/EUR rates in the last 24 hours, we’re now pretty much back where we were yesterday, with Pound/Euro rates around €1.21. The ECB news has caused GBP/USD to fallinto the $1.65’s. So let’s have a look at what he said, and how it affected exchange rates…
The chart above shows how the GBP/EUR rate has moved today. Let’s look in detail what casued the swing in rates…
In my post yesterday, I expected one of two scenarios. Either Draghi would say inflation will sort itself out without intervention, which would have caused exchange rates to fall. The other scenario was that he would hint at easing, which I thought likely, meaning rates would go up.
So what happened? He said both! You can read his comments in full here. At the start of his speech he said:
“recent information remains consistent with our expectation” following this with “inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with our aim of maintaining inflation rates” – this was scenario one, and as expected this strengthened the Euro and pushed rates as low as 1.2030.
But quick as a flash, he then added:
“we do not exclude further monetary policy easing and we firmly reiterate that we continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time.” And then added that “The Governing Council is unanimous in its commitment to using unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation.” – this was scenario two, effectively hinting that in fact they may pursue some type of Quantitative Easing programme. This caused the Euro to weaken, and pushed rates back to the €1.21 level.
I expected him to hint at easing, which he did, but I didn’t expect him to cover all bases, which is why despite a bit of volatility, Sterling/Euro effectively remains unchanged at €1.21.
If you need to buy Euros, this could be the peak
I don’t personally think it will go much higher, unless there are further signs that the ECB want to pursue a QE programme, so if you need to buy Euros, consider locking the rate in where it is with a Forward contract.
In this way you can lock in the rate now for up to 2 years by lodging 10% of the total you want to convert, protecting against the rate dropping.
To be perfectly honest, I think the market will remain flat for some time now, and I don’t expect it to drop below €1.20, so Euro sellers should consider the same strategy. Contact me to get a quote on your exchange.
This is why the rate to buy dollars dropped, while the rate to buy Euros rose.
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