Wednesday 20th November 2013
So the Bank of England news this morning was a bit of a damp squib, with all 9 members voting to hold QE and interest rates, so didn’t have much effect on exchange rates.
However, the Pound/Euro rate has shot back up to €1.20 this afternoon, after a surprise indication that the European Central Bank may cut the deposit rate to negative. So in today’s post I’m going to explain why this has caused the rate to go up, and analyse whether it will keep rising or drop back away.
Pound/Euro rates shoot up to €1.20
A report from Bloomberg this afternoon hinted that the European Central Bank may reduce the deposit rate to negative.
This effectively means that commercial lenders that deposit funds with the ECB getting less return, or even potentially have to pay to lodge funds with them. These rumours caused investors to sell the Euro, and this has caused it to weaken and become cheaper to buy.
As you can see from the chart above, there was an immediate reaction to the news, and Pound/Euro rates climbed to €1.20, a cent higher than we started the day. What is interesting is that this is not a scheduled release, which is usually what causes exchange rates to move, as I outlined in my last post.
This shows that while it's usually scheduled data releases that move the rate, surprises like this can also have an immediate effect.
For those that need to buy Euros, this is great news as the rate is now back to the highest it has been since January. Of course the key question is whether the rate will continue to climb, or drop back away.
Will rates keep rising or drop back away?
This is impossible to forecast of course, but in my view these gains will not be sustained. We have seen the rate hit €1.20 several times in recent weeks, however each and every time this happens, the gains are short lived, the Euro fights back and the exchange rate drops again.
This is partly due to the fact this is a key technical level, at which many automatic orders to buy Euros are triggered. As the market is then buying Euros again, it gives it strength and the rate drops away.
Another reason I think rates could drop back is that the Bank of England don’t want a high exchange rate – it makes exports more expensive and so should rates hold firm above this level, we may see the BoE move to weaken the Pound to bring rates back in check.
Indeed since we hit €1.20 at about 4pm this afternoon, rates have remained there and have failed to rise further.
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Labels: Bank of England minutes, Best Exchange Rates, ECB, Euro weakness, GBP/EUR, Pound/Euro, Pound/Euro €1.20, will rate go up or down