Wednesday 21st January 2015
Today we have seen economic data that has pushed the GBP/EUR rate back below the key €1.30 level. Let’s take a look at why the Pound has fallen against the Euro, and which way the currency pair may move in the coming weeks.
UK Unemployment and Interest Rates
At 09:30am this morning the latest UK Unemployment figures were released, showing a drop to just less than 2 million, which is the lowest level for more than six years. However there are signals that growth in employment may be easing, as this drop is the smallest since the three months to September 2013.
Also this morning we saw the Bank of England keep interest rates on hold, as expected, but what was surprising is that all 9 members voted to keep the status quo. Martin Weale and Ian McCafferty, who since August had called for a hike in rates, seem to have changed their mind. As all 9 members voted, it now looks like interest rates won’t be going up in the UK until mid-2016, and as a result the Pound has weakened off.
ECB to conduct QE
2 European Central Bank (ECB) officials today said that they will indeed pursue a Quantitative Easing programme, to the tune of €50bn per month for the next 2 years. The actual announcement is tomorrow and is widely expected to happen, but today’s comments have caused the Euro to strengthen, and coupled with the UK news I mentioned earlier, pushed GBP/EUR rates below €1.30:
So why has the Euro strengthened if QE is going to happen?
The market had already priced in the expectation of QE. The actual announcement however goes further than analysts had been expecting, as most thought that a 1 year programme would be announced. As today’s comments hint at a much longer QE programme, it seems that the market has taken this as a positive sign as the Euro has gained strength across the board this afternoon. It could also be the case that the expectation had been overly priced into the market and now the reality is here, there has been a correction and the 7 year GBP/EUR high seems to have been short lived.
What next for Pound/Euro?
We could see further movements tomorrow when the markets react to the actual announcement, however while in general I expect the Pound to keep outperforming the weakening Euro, I can’t see any further significant gains given most of Sterling’s recent strength was on the expectation of interest rates going up , which is now unlikely to happen soon.
So with the GBP/EUR rate at the key €1.30 level, it’s a good time for those that need to buy or sell Euros to take stock of their requirement and decide when to fix a rate.
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