Wednesday 8th January 2014
We have seen the Pound gain in strength today, and Sterling/Euro exchange rates have risen to €1.21. In today’s post I’m going to give my view on why I think this has happened, and also have a look at what could happen tomorrow (Thursday) which I think is going to be key for what happens to exchange rates in the short term.
It’s a very important day for currencies as we have some key data from 3 of the world’s major central banks in the next 24 hours. But first, let’s look at today’s gains….
Pound/Euro rates rise to €1.21
As you can see from the chart, Pound/Euro rates have gained nicely today, hitting €1.21 before levelling off. So what has caused the jump in rates?
One factor could be the unemployment numbers from the Eurozone that were released earlier. It shows unemployment is now at 12.1%, which is much higher than we have in the UK. As such this may have weakened the Euro causing rates to rise. But to be honest, the number was pretty much as expected, and EU Retail Sales were actually better than forecast, so I don’t think that’s the reason for the movement today.
I think the reason for the rise is more market expectation on what will happen in the next 24 hours, when we have some key releases from 3 of the worlds major Central Banks – the Bank of England, the European Central Bank and the Federal Reserve. So, let’s have detailed look at what effect any action by these central banks could have on exchange rates.
*** Key Central Bank decisions in the next 24 hours ***
European Central Bank (ECB)
Tomorrow at 12:45pm the ECB will announce their latest decision on interest rates. I think it is very unlikely that they will change the rate, but at 13:30pm the ECB President Mario Draghi will give a press conference.
This is very important, as if he hints that rates may be cut in the coming months, then the Euro is likely to weaken. I think there is a good chance rates may go down in the EU, as inflation is falling in the EU. I also think that could be the reason that the Pound/Euro rate has gone up today, as markets start to factor in the likelihood of this happening. So listen carefully tomorrow lunchtime to his comments, and see the effect it has on rates. If he doesn’t hint at rate cuts, then expect GBP/EUR rates to drop back away.
Bank of England (BoE)
Like the ECB, the BoE also announce their latest decision on interest rates. Also like the ECB, I don’t expect any changes or surprises.
Sometimes the governor, Mark Carney, makes comments after the decision, and usually he is quite positive about the Pound. I don’t think the BoE decision will cause many waves, and all eyes will be on the ECB
US Federal Reserve
This evening, minutes from the Fed's December meeting, when the central bank announced its decision to begin trimming its Quantitative Easing programme will be released.
Much like with the ECB, it’s comments that are sometimes made that will move the markets, and if the minutes are very positive, expect Pound/Dollar rates to drop back away.
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