As I mentioned in yesterday’s post, there was a chance that the ECB would increase their QE stimulus programme, and this is exactly what they decided to do. They were supposed to have finished the stimulus by March next year, but they’ve extended this to December.
This means that every month, the ECB will buy €80bn of corporate bonds with newly created money. From March, they will buy €60bn every month. The fact that new money is created to do this weakens the Euro due to the fact it is diluted, and when the Euro weakens, it becomes cheaper to purchase, pushing up the Pound/Euro exchange rate. ECB president Mario Draghi also said that uncertainty persists, and they would increase the scope and amounts next year if necessary, further hampering the single currency.
If you look at the chart below, you can easily see the moment the Euro weakened, pushing GBP/EUR rates up to around the €1.1850 mark:
The current GBP/EUR levels are pretty good considering last month they were down at €1.10. The market has simply corrected due to the fact that the UK economy is doing very well, despite the doom mongering in the press following the referendum. In stark contrast, the EU economy is stagnant, unemployment is high, and there is discontent and political uncertainty across the bloc. This is now reflected in the exchange rate.
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