Wednesday, 5 March 2014

Pound/Euro rises ahead of Central Bank decisions

Wednesday 5th March 2014 
We started this week with some volatility in the currency markets due to the tensions in Ukraine. This has now eased somewhat, and a sense of calm returned, with the United States and Russia set to hold talks on easing East-West tension in Ukraine. 

This morning we had some UK data that showed the UK service sector continued to "expand strongly" with job creation at its fastest pace for four months. The survey also found that confidence in the economic outlook rose to its highest since September 2009. 

This set the day for the Pound, which has steadily risen throughout today as you can see from the chart below. At the time of writing Pound/Euro rates have risen to 1.2177 and Pound/Dollar is back above 1.67. 


Central Bank decisions tomorrow could affect Pound/Euro

Tomorrow we will see the latest decisions from the Bank of England (BoE) and European Central Bank (ECB) with regards to interest rates and quantitative easing. I don’t expect any change in policy from the BoE, but the ECB could make moves that may alter the GBP/EUR rate. 

I think there is a small chance that they may cut the deposit rate, which would weaken the Euro pushing GBP/EUR rates higher. This is due to their latest inflation numbers indicating a cut is needed. I also think today’s rise in Pound/Euro rates is in anticipation of a rate cut. 

Even if they don’t actually cut the rate, at 13:30pm, 45 minutes after the decision, the ECB president Mario Draghi will give a press conference, and any comments he makes could well alter the value of the Euro. If he hints at rates being cut at future meetings, again we may see Pound/Euro rates climb further. 

However there is also the chance that there will be no cut, and no hint of a cut. In this scenario I would expect exchange rates to drop away, because today’s gains are partly due to the chance of a cut being priced into the market in advance. 

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The current exchange rate is still very close to the best it’s been in over a year, but we are still failing to see rates climb higher than their peak of last month. So it’s a great time to need to buy Euros and if I needed to buy the single currency I personally wouldn’t take the risk in holding out for much more, as I think there is much more to lose than there is to gain. 

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