Thursday, 4 December 2014

Pound/Euro gains before dropping back to €1.26 again

Thursday 4th December 2014
It's been a busy week, but all in all we're back to where we started with GBP/EUR rates, now sitting around the €1.26 level again. Let's take a look at what's been happening. 

Autumn Statement causes Sterling to rise


Wednesday was a good day for the Pound, starting with better than expected services PMI that gave the Pound a boost. This was compounded by the budget statement, which the markets took very positively for the Pound and GBP/EUR rose by over 1% on the day, getting to 1.2766 at the peak. However as is often the case, spikes to the upside can be very short lived and this proved to be the case again during trading today, when the ECB's draghi made comments that pulled the rate back towards the €1.26 level. 


What caused the GBP/EUR rate to fall? 


It was largely comments by the European Central Bank (ECB) president Mario Draghi. As always for the 1st Thursday in the month, the UK and EU central banks announced their decision on interest rates, with both opting to keep rates on hold at record lows. This was expected, and soon afterwards the ECB president gave a press conference. 

You can read his full comments here. He basically hinted that QE is coming for the Eurozone, but the market was expecting a little more clarity. So if it sounds as though they are edging towards quantitative easing, why didn’t the Euro weaken and cause GBP/EUR to go up further? 

Firstly it's worth remembering that the ECB has already started something that has a lot in common with QE. It is buying financial assets based on private sector loans with newly created money. The difference between this and the US and UK QE programmes is that firstly it’s much, much smaller. Secondly the assets being purchased don’t actually include government debt. 

The markets were actually expecting him to be a little clearer on exactly when and how their QE programme would be expanded. What he actually said is that there had been "a very rich, ample discussion" on what unconventional instruments the bank had available to it within its mandate, adding that “We discussed broadly all sorts of measures, we... discussed various options of QE. And more work is needed and... we'll keep you informed." 

In the absence of any clear indication of further stimulus that had been expected, the recent weakening of the Euro had been reversed, and it is this that caused the single currency to strengthen and pull rates back towards the €1.26 level where it has felt comfortable at in recent weeks. 

Tomorrow's data


GBP/EUR – we have Inflation Expectation measures for the UK, which could affect the consensus of when interest rates will rise, and so could affect the Pound. Over in Europe we have the latest GDP measures which if better than the expected 0.2% could cause GBP/EUR to fall. 

GBP/USD – there are lots of released from the USA later this afternoon including factory orders, Jobless Claims, and NonFarm Payrolls. The consensus is for 232,000 jobs to have been created in the USA last month, however as the prediction is usually quite far off the actual number, anything higher than this would cause GBP/USD to fall, and vice versa. 

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Have a great weekend.