Tuesday, 25 March 2014

EU hints at rate cut, but GBP/EUR won't break €1.20

Tuesday 25th March 2014 
Good afternoon. We have seen a little volatility today with Pound/Euro rates rising from €1.1920 up to €1.20, before hitting resistance and falling back away. Pound/Dollar continues to trade around the $1.65 mark. 

In today’s post I’m going to explain what caused the swing in GBP/EUR rates. First, let's look at today's GBP/EUR chart. In it you can see rates rising to €1.20 before falling away. I will explain why in a few moments...


UK Inflation better than expected 

First let's look at UK data. In my post yesterday I outlined that one of today’s key data releases was UK inflation, mentioning that if the figure was higher than 1.6% the Pound would strengthen. 

The actual number came in at 1.7%, so slightly above forecast. This gave the Pound a little push from €1.1920 up to €1.1945 – a small gain, reflected in the small increase in the inflation rate. 

You can read a full report about the inflation numbers here on the BBC website  

EU President gives speech, hints at ECB rate cut

The main reason for the spike in rates up to €1.20 was comments by the ECB president Mario Draghi, which I also highlighted yesterday as something that may move rates. A week or so ago, his positivity about the Eurozone economy cause the Euro to strengthen and pull GBP/EUR below €1.20.

You can read his full speech here, but to outline the key comments I took from it: 

“we commit to keep our policy interest rates as low as they are currently or even lower for an extended period of time." ... “In particular, our forward guidance implies that short-term real rates, which are negative today, will become even more negative in the foreseeable future.”  

So today was different – as you can see from the above, he hinted at interest rates coming down in the EU. This weakened the Euro due to the lower return a cut in interest rates would offer investors. A weaker Euro is cheaper to buy, and so the Pound/Euro rate rose to €1.20.  

Sterling/Euro hits €1.20 before dropping back away – why was this?  

In a recent post I explained something called Support and Resistance. In it I outlined the reasons why I think rates won't go above €1.20 for some time, which has been illustrated quite clearly in today's market movements. If you haven’t read it already, it’s worth looking at if you need to buy Euros any time soon, as this may be the highest the exchange rate gets for a while.

Pound/Dollar also remains around $1.65 for the same reasons I outlined in the Support and Resistance post I've linked to above.

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