Thursday 8th May 2014
Sterling/Euro initially slipped as low as 1.2120 this afternoon, before soaring back and smashing through the €1.22 level, after the European Central Bank (ECB) President Mario Draghi gave a speech weakening the Euro. At the time or writing rates seem to have levelled off at €1.2238 – around the best it has been since January 2013, so great news for Euro buyers.
In today’s post I’ll look at the actions of the central banks here in the UK and in the Eurozone, analyse how it has affected exchange rates, and where Pound rates may head in the coming weeks and months.
Bank of England (BoE) takes no action as expected
UK interest rates have been held at the record low of 0.5% for another month by the Bank of England, as we all expected them to do. They also made no change in their bond buying stimulus programme.
So, no surprises then from the BoE today. Much of the Pound’s strength this year are due to the fact most economists think they will start raising interest rates next year, due to recent evidence that the UK economic recovery is strengthening.
Next week’s Inflation Report should provide a little more insight into what’s will happen with interest rates, and I think this will point to rates remaining very low for some time yet, so I don’t think there is any more strength to come from Sterling in the short term.
European Central Bank cause GBP/EUR rates to rise
At lunchtime, the European Central Bank (ECB) announced it has also kept its benchmark interest rate at a record low of 0.25%. Persistently low inflation across the euro-bloc has prompted growing calls that the ECB should cut rates to head off deflation risks, and there was an outside risk of this happening.
However due to recent economic data from the EU pointing to a stronger recovery and improved financing conditions, no action was taken. As you can see from the chart below this initially caused GBP/EUR rates to drop to 1.2120, however as the chart illustrates the dip was not to last…
Shortly after the decision, the ECB president spoke at a press conference saying that the ECB was “comfortable with acting next time”, raising expectations that the bank could alter policy in June and sending the value of the euro lower and therefore cheaper to buy. At the time of writing GBP/EUR rates sit at €1.2220, around the highest it has been in 16 months.
Will Pound/Euro keep going higher or drop back away?
The coming week will determine whether the GBP/EUR rate can now sustain itself above the €1.22 level, or whether the recent trend will repeat itself whereby it drops back away within a few days. This is the strongest indication yet that Draghi will do something next month, and if the markets believe this then there is every chance rates could stay above this level.
Personally I expect it to drop back away again, purely as that has been the trend throughout 2014, so Euro buyers may want to strike while the rate is good.
There is no way of predicting what exchange rates will do, however with a good broker on your side to explain what is moving the rate, what different options and contract types you can consider to protect you against the rate moving the wrong way, then you can save a considerable sum.