Thursday 6th March 2014
As I predicted in my post yesterday, Pound/Euro rates have fallen away after the European Central Bank did not cut their interest rate, and gave no hint that it would be doing so anytime soon. You can read his full statement here.
As you can see from the chart below, rates started falling at 13:30pm when the ECB president Mario Draghi began his press conference.
So why exactly have GBP/EUR exchange rates fallen?
It’s all to do with the fact interest rates have a key effect on the value of a currency. Higher interest rates attract investment, strengthening a currency. Lower interest rates weaken a currency due to the lower return on offer.
Data in recent weeks had shown that Eurozone inflation was at 0.8%, well below the ECB's 2% target which has prompted deflation worries. To combat deflation, many thought the ECB would have to cut interest rates. The rumour of this started to get priced into the market, weakening the Euro and pushing GBP/EUR rates up to €1.22 in the last week.
In today’s press conference Draghi said that “We saw our baseline by and large confirmed," he said. "There is a continuation of a modest recovery." The projections for Eurozone growth in 2014 was raised slightly from 1.1% to 1.2%. The bank also expects a gradual increase in growth to 1.5% in 2015 and 1.8% in 2016.
So because it’s now clear the ECB won’t be cutting rates any time soon, the Euro weakness that had been priced into the market was reversed, causing the Euro to gain strength and become more expensive to purchase. This is why rates have fallen from €1.22 to below €1.21.
Will the exchange rate recover?
It’s impossible to predict. In recent months, when rates have dropped we have seen them bounce back again within a few days. This could be the case again. If so, those of you that need to sell Euros to Pounds should consider taking advantage of the 1% move in your favour.
For those needing to buy Euros of course, the rate has worsened for you today. We may or may not see it bounce back, so placing a Stop Loss order is a good strategy in the current climate.
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